Test your basic knowledge |

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






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






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






5. Both probability and cost of tail events are considered






6. Excess return divided by portfolio volatility (std dev) Sp = (E(Rp) - Rf)/(std dev of Rp) - Better for non- diversified portfolios






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






8. Volatility of unexpected outcomes






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






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






11. 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






12. 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.






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






14. Quantile of a statistical distribution






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






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






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






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






19. Strategic risk - Business risk - Reputational risk






20. Multibeta CAPM Ri - Rf =






21. 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






22. Leeson took large speculative position in Nikkei 225 disguised as safe transactions by fake customers - Earthquake increased volatility and destroyed short put options - Losses of 1.25 billion and forced bankruptcy - Necessity of an independent tradi






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






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






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






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






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






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






29. 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






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






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






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






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






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






35. Valuation focuses on mean of distribution vs risk mgmt focuses on potential variation in payoffs - needs more precision for pricing - VAR doesn't b/c noise cancels out






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






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






38. Interest rate movements - derivatives - defaults






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






40. Asset-liability/market-liquidity risk






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






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






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






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






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






46. Potential amount that can be lost






47. Quantile of an empirical distribution






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






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






50. 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







Sorry!:) No result found.

Can you answer 50 questions in 15 minutes?


Let me suggest you:

Browse all subjects

Browse all tests

Most popular tests



Major Subjects

Tests & Exams


AP
CLEP
DSST
GRE
SAT
GMAT

Browse all subjects

Browse all tests

Most popular tests