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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. 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






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






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






4. Potential amount that can be lost






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






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






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






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






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






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






11. Excess return divided by portfolio beta Tp = (E(Rp) - Rf)/portfolio beta - Better for well diversified portfolios






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






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






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






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






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






17. 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






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






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






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






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






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






23. Both probability and cost of tail events are considered






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






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






26. 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






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






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






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






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






31. 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






32. 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.






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






34. Future price is greater than the spot price






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






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






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






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






39. Hazard - Financial - Operational - Strategic






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






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






42. Risk of loses owing to movements in level or volatility of market prices






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






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






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






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






47. 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






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






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






50. 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