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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. Misleading reporting (incorrect market info) - Due to large market moves - Due to conduct of customer business






2. Wrong distribution - Historical sample may not apply






3. Quantile of a statistical distribution






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






5. Strategic risk - Business risk - Reputational risk






6. Country specific - Foreign exchange controls that prohibit counterparty's obligations






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






8. Rp = XaRa + XbRb






9. Changes in vol - implied or actual






10. Market risk - Liquidity risk - Credit risk - Operational risk






11. Asses firm risks - Communicate risks - Manage and monitor risks






12. Volatility of unexpected outcomes






13. Std dev between portfolio return and benchmark return TE = std dev * (Rp- Rb) - Benchmark funds






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






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






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






17. The need to hedge against risks - for firms need to speculate.






18. 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






19. Need to assess risk and tell management so they can determine which risks to take on






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






21. Probability distribution is unknown (ex. A terrorist attack)






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






23. Both probability and cost of tail events are considered






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






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






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






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






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






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






30. (E(Rp) - MAR)/(sqrt((1/T)summation(Rpt- MAR)^2) - MAR - minimum acceptable return






31. Asset-liability/market-liquidity risk






32. 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






33. Capital Asset Pricing Model Ri = Rf + beta*(Rm - Rf)






34. Unanticipated movements in relative prices of assets in hedged position






35. Hazard - Financial - Operational - Strategic






36. Prices of risk are common factors and do not change - Sensitivities can change






37. Potential amount that can be lost






38. Focus on adverse tail of distribution - Relevant for determining economic capital (EC) requirements






39. 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






40. Multibeta CAPM Ri - Rf =






41. RM cannot increase firm value when it costs the same to bear a risk w/in the firm or outside the firm - For RM to increase firm value it must be more expensive to bear risks internally than to pay capital markets to bear them.






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






43. Designate ERM champion - usually CRO - Make ERM part of firm culture - Determining all possible risks - Quantifying operational and strategic risks - Integrating risks (dependencies) - Lack of risk transfer mechanisms - Monitoring






44. Quantile of an empirical distribution






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






46. No transaction costs - assets infinitely divisible - no personal tax - perfect competition - investors only care about mean and variance - short- selling allowed - unlimited lending and borrowing - homogeneity: single period - homogeneity: same mean






47. When two payments are exchanged the same day and one party may default after payment is made






48. Credit risk that occurs when there is a change in the counterparty's ability to perform its obligations






49. Losses due to market activities ex. Interest rate changes or defaults






50. Occurs the day when two parties exchange payments same day