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






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






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






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






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






6. Sold complex derivatives to Proctor & Gamble and Gibson - Were sued due to claims that they deceived buyers - Need for better controls for matching complexity of trade with client sophistication - Need for price quotes independent of front office Met

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






8. Excess return equated to alpha plus expected systematic return E(Rp) - Rf = alpha + beta(E(Rm) - Rf)

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9. Quantile of a statistical distribution






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






11. May not scale over time- Historical data may be meaningless - Not designed to account for catastrophes - VaR says nothing about losses in excess of VaR - May not handle sudden illiquidity






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






13. Proportion of loss that is recovered - Also referred to as "cents on the dollar"






14. Returns on any stock are linearly related to a set of indexes






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






16. Concentrate on mid- region of probability distribution - Relevant to owners and proxies






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






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






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






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






21. Human - created: business cycles - inflation - govt policy changes - wars - Natural: weather - quakes






22. Potential amount that can be lost






23. Wrong distribution - Historical sample may not apply






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






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






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






27. Curve must be concave - Straight line connecting any two points must be under the curve






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






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






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






31. 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






32. Multibeta CAPM Ri - Rf =






33. 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






34. Risks that are assumed willingly - to gain a competitive edge or add shareholder value






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






36. 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






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






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






39. Inability to make payment obligations (ex. Margin calls)






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






41. Return is linearly related to growth rate in consumption






42. Volatility of expected outcomes - Outcomes are random but distribution is known or approximated






43. Loss resulting from inadequate/failed internal processes - people or systems - back-office problems - settlement - etc - reconciliation






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






45. Future price is greater than the spot price






46. When firm has so much debt that it leads to making investment decisions that benefit shareholdser but affect total firm value adversely






47. Security is a financial claim issued to raise capital - Primary securities are backed by real assets - Secondary securities are backed by primary securities






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






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






50. Track an index with a portfolio that excludes certain stocks - Track an index that must include certain stocks - To closely track an index while tailoring the risk exposure