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FRM: Foundations Of Risk Management

Instructions:
  • Answer 50 questions in 15 minutes.
  • If you are not ready to take this test, you can study here.
  • Match each statement with the correct term.
  • Don't refresh. All questions and answers are randomly picked and ordered every time you load a test.

This is a study tool. The 3 wrong answers for each question are randomly chosen from answers to other questions. So, you might find at times the answers obvious, but you will see it re-enforces your understanding as you take the test each time.
1. Excess return divided by portfolio beta Tp = (E(Rp) - Rf)/portfolio beta - Better for well diversified portfolios






2. Efficient frontier with inclusion of risk free rate - Straight line with formula Rc = Rf + ((Ra - Rf)/std dev(a))*std dev(c) - c is the total portfolio - a is the risky asset






3. Asset-liability/market-liquidity risk






4. Economic Cost of Ruin(ECOR) - Enhancement to probability of ruin where severity of ruin is reflected






5. People risk = fraud - etc. - Model risk = flawed valuation models - Legal risk = exposure to fines and lawsuits






6. Relative portfolio risk (RRiskp) - Based on a one- month investment period






7. Both probability and cost of tail events are considered






8. Probability that a random variable falls below a specified threshold level






9. Covariance = correlation coefficient std dev(a) std dev(b)






10. Firm may ignore known risk - Somebody in firm may know about risk - but it's not captured by models - Realization of a truly unknown risk






11. Relationship drawn from CML - RAP = [(market std dev)/(portfolio std dev)]*(Portfolio return - risk free rate) + risk free rate - annualized






12. Enterprise Risk Management - ERM is a discipline - culture of enterprise - ERM applies to all industries - ERM is not just defensive - adds value - ERM encompasses all risks - ERM addresses all stakeholders






13. Summarizes the worst loss over a period that will not be exceeded by a given level of confidence - Always one tailed






14. Risk replaced with VaR (Portfolio return - risk free rate)/(portfolio VaR/initial value of portfolio)






15. Long Term Capital Management - Renowned quants produced great returns with arbitrage- type trades - Unexpected and extreme events resulted in devaluation of Russian Rouble - resulting in a 3.65 billion dollar bailout - Failure to account for illiquid






16. Sqrt((Xa^2)(variance of a) + (1- Xa)^2(variance of b) + 2(Xa)(1- Xa)(covariance))






17. Quantile of an empirical distribution






18. Unanticipated movements in relative prices of assets in a hedged position - All hedges imply some basis risk






19. Percentile of the distribution corresponding to the point which capital is exhausted - Typically - a minimum acceptable probability of ruin is specified - and economic capital is derived from it






20. Gamma = market price of the consumption beta - Beta = E(r) of zero consumption beta






21. Concave function that extends from minimum variance portfolio to maximum return portfolio






22. The uses of debt to fall into a lower tax rate






23. Xmvp = ((variance of b) - covariance)/((variance of a) + (variance of b) - 2 * covariance)






24. Firms became multinational - - >watched xchange rates more - deregulation and globalization






25. Long in options = expecting volatility increase - Short in options = expecting volatility decrease






26. Capital structure (financial distress) - Taxes - Agency and information asymmetries






27. Multibeta CAPM Ri - Rf =






28. CAPM requires the strong form of the Efficient Market Hypothesis = private information






29. Equilibrium can still be expressed in returns - covariance - and variance - but they become complex weighted averages






30. Too much debt - Causes shareholders to seek projects that create short term capital but long term losses






31. Ri = Rz + (Rm - Rz)*beta - Rz = return on zero- beta portfolio






32. Those which corporations assume whillingly to create competitive advantage/add shareholder value - Business Decisions: investment decisions - prod - dev choices - marketing strategies - organizational struct. - Business Environment: competitive and






33. ex. Human capital - Equilibrium return can be higher or lower than it is under standard CAPM






34. Derives value from an underlying asset - rate - or index - Derives value from a security






35. Absolute and relative risk - direction and non-directional






36. Obtained unsecured borrowing of 300 million by exploiting flaw in computing US government bond collateral - Had only 20 million in capital - Chase absorbed losses since they brokered deal - Called for better process control and more precise methods f






37. Difference between forward price and spot price - Should approach zero as the contract approaches maturity






38. The lower (closer to - 1) - the higher the payoff from diversification






39. Simple form of CAPM - but market price of risk is lower than if all investors were price takers






40. Volatility of unexpected outcomes






41. Law of one price - Homogeneous expectations - Security returns process






42. When negative taxable income is moved to a different year to offset future or past taxable income






43. Expected value of unfavorable deviations of a random variable from a specified target level






44. E(Ri) = Rf + beta[(E(Rm)- Rf)- (tax factor)(dividend yield for market - Rf)] + (tax factor)(dividend yield for stock - Rf)






45. Cannot exit position in market due to size of the position






46. Managing risks is a core activity at financial companies - Industrial companies hedge financial risks






47. Make common factor beta - Build optimal portfolios - Judge valuation of securities - Track an index but enhance with stock selection






48. John Rusnak - a currency option trader - produced losses of 691 million by using imaginary trades to disguise large naked positions. - Enforced need for back office controls






49. Risk- adjusted rating (RAR) - Difference between relative returns and relative risk






50. Joseph Jett exploited an accounting glitch to book 350 million of false profits (government bonds) - Massive misreporting resulted in loss of confidence in management - Failed to take into account the present value of a forward - Learn to investigate