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






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






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






4. 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






5. Asset-liability/market-liquidity risk






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






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






8. 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






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






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






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






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






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






14. Modeling approach is typically between statistical analytic models and structural simulation models






15. 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






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






17. 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






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






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






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






21. 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






22. Interest rate movements - derivatives - defaults






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






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






25. 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






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






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






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






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






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






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

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






33. Potential amount that can be lost






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






35. Liquidity and maturity transformation - Brokers - Reduces transaction and information costs between households and corporations






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






37. Quantile of an empirical distribution






38. 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






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






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






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






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






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






44. Strategic risk - Business risk - Reputational risk






45. 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






46. Future price is greater than the spot price






47. IR = (E(Rp) - E(Rb))/(std dev(Rp- Rb)) - Evaluate manager of a benchmark fund






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






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






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