SUBJECTS
|
BROWSE
|
CAREER CENTER
|
POPULAR
|
JOIN
|
LOGIN
Business Skills
|
Soft Skills
|
Basic Literacy
|
Certifications
About
|
Help
|
Privacy
|
Terms
|
Email
Search
Test your basic knowledge |
FRM: Foundations Of Risk Management
Start Test
Study First
Subjects
:
business-skills
,
certifications
,
frm
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. Asset-liability/market-liquidity risk
Options motivation on volatility
Market imperfections that can create value
Liquidity risk
Treynor measure
2. Risk- adjusted rating (RAR) - Difference between relative returns and relative risk
Effect of heterogeneous expectations on CAPM
3 main types of operational risk
Morningstar Rating System
Formula for covariance
3. Risk of loses owing to movements in level or volatility of market prices
Shape of portfolio possibilities curve
Market risk
3 main types of operational risk
Risk
4. Quantile of a statistical distribution
Allied Irish Bank
Parametric VaR
Funding liquidity risk
RAR = relative return of portfolio (RRp)
5. Occurs the day when two parties exchange payments same day
CAPM (formula)
Financial Risk
Settlement risk
Ri = Rz + (gamma)(beta)
6. 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
Multi- period version of CAPM
Prices of risk vs sensitivity
Practical considerations related to ERM implementatio
Nonmarketable asset impact on CAPM
7. Covariance = correlation coefficient std dev(a) std dev(b)
Sortino ratio
Formula for covariance
Ri = ai + bi1l1 + bi2l2....+ei
Valuation vs. Risk management
8. 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
What lead to the exponential growth to derivatives mkt?
Asset transformers
Traits of ERM
RAR = relative return of portfolio (RRp)
9. Unanticipated movements in relative prices of assets in a hedged position - All hedges imply some basis risk
Performance- related metrics
Basis risk
Kidder Peabody
Ways firms can fail to account for risks
10. Changes in vol - implied or actual
Performance- related metrics
Volatility Market risk
Shortfall risk
Jensen's alpha
11. Absolute and relative risk - direction and non-directional
Forms of Market risk
Traits of ERM
Market risk
BTR - Below Target Risk
12. Capital Asset Pricing Model Ri = Rf + beta*(Rm - Rf)
Jensen's alpha
Market imperfections that can create value
Security (primary vs secondary)
CAPM (formula)
13. People risk = fraud - etc. - Model risk = flawed valuation models - Legal risk = exposure to fines and lawsuits
Effect of heterogeneous expectations on CAPM
Basis risk
3 main types of operational risk
Sovereign risk
14. Gamma = market price of the consumption beta - Beta = E(r) of zero consumption beta
Basis
Probability of ruin
Ri = Rz + (gamma)(beta)
Three main reasons for financial disasters
15. Curve must be concave - Straight line connecting any two points must be under the curve
Correlation coefficient effect on diversification
Shape of portfolio possibilities curve
Probability of ruin
Carry- backs and carry- forwards
16. 1971: Fixed Exchange rate system broke down and was replaced by more volatile floating rate - 1973: Oil price shocks - - >high inflation - - >interest rate swings - 1987: Black Monday - OCt 19 - mkt fell 23% - 1989: Japanese stock price bubble -
Asset transformers
Source of need for risk management
Options motivation on volatility
Barings
17. Liquidity and maturity transformation - Brokers - Reduces transaction and information costs between households and corporations
Source of need for risk management
Multi- period version of CAPM
Prices of risk vs sensitivity
Asset transformers
18. When firm has so much debt that it leads to making investment decisions that benefit shareholdser but affect total firm value adversely
Debt overhang
Operational risk
Shortfall risk
Carry- backs and carry- forwards
19. Simple form of CAPM - but market price of risk is lower than if all investors were price takers
Effect of non- price- taking behavior on CAPM
Morningstar Rating System
Options motivation on volatility
Carry- backs and carry- forwards
20. E(Ri) = Rf + beta[(E(Rm)- Rf)- (tax factor)(dividend yield for market - Rf)] + (tax factor)(dividend yield for stock - Rf)
CAPM with taxes included (equation)
Contango
CAPM assumption for EMH
Operational risk
21. Returns on any stock are linearly related to a set of indexes
Probability of ruin
Basis
Ri = ai + bi1l1 + bi2l2....+ei
Solve for minimum variance portfolio
22. Wrong distribution - Historical sample may not apply
Sovereign risk
Differences in financial risk management for financial companies vs industrial companies
Where is risk coming from
Ways risk can be mismeasured
23. Risks that are assumed willingly - to gain a competitive edge or add shareholder value
Prices of risk vs sensitivity
CAPM assumption for EMH
Standard deviation of two assets
Business risks
24. Law of one price - Homogeneous expectations - Security returns process
Treynor measure
Traits of ERM
APT (equation and assumptions)
Debt overhang
25. Misleading reporting (incorrect market info) - Due to large market moves - Due to conduct of customer business
Expected return of two assets
Valuation vs. Risk management
Three main reasons for financial disasters
CAPM (formula)
26. Strategic risk - Business risk - Reputational risk
What lead to the exponential growth to derivatives mkt?
VaR- based analysis (formula)
Barings
Risks excluded from operational risk
27. CAPM requires the strong form of the Efficient Market Hypothesis = private information
Zero- beta CAPM (two factor model)
Solvency-related metrics
Ways firms can fail to account for risks
CAPM assumption for EMH
28. Prices of risk are common factors and do not change - Sensitivities can change
VaR- based analysis (formula)
Business risks
Prices of risk vs sensitivity
CAPM (formula)
29. Volatility of unexpected outcomes
Efficient frontier
Risk
Financial risks
Shortcomings of risk metrics
30. Difference between forward price and spot price - Should approach zero as the contract approaches maturity
Financial risks
Market risk
Basis
Jensen's alpha
31. (E(Rp) - MAR)/(sqrt((1/T)summation(Rpt- MAR)^2) - MAR - minimum acceptable return
Sortino ratio
Credit event
Firms becoming more sensitive to changes(bank deregulation)
Multi- period version of CAPM
32. Credit risk that occurs when there is a change in the counterparty's ability to perform its obligations
Efficient frontier
Credit event
Formula for covariance
Liquidity risk
33. Inability to make payment obligations (ex. Margin calls)
Funding liquidity risk
Efficient frontier
Asset liquidity risk
Practical considerations related to ERM implementatio
34. Country specific - Foreign exchange controls that prohibit counterparty's obligations
Exposure
Contango
Sovereign risk
Morningstar Rating System
35. 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
Valuation vs. Risk management
CAPM with taxes included (equation)
Options motivation on volatility
Allied Irish Bank
36. Loss resulting from inadequate/failed internal processes - people or systems - back-office problems - settlement - etc - reconciliation
EPD or ECOR - Expected Policyholder Deficit (EPD)
Nonmarketable asset impact on CAPM
Treynor measure
Operational risk
37. Too much debt - Causes shareholders to seek projects that create short term capital but long term losses
Risk- adjusted performance measure (RAP)
Debt overhang
Forms of Market risk
Treynor measure
38. 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
Where is risk coming from
What lead to the exponential growth to derivatives mkt?
Drysdale Securities (Chase Manhattan)
Asset transformers
39. Joseph Jett exploited an accounting glitch to book 350 million of false profits (government bonds) - Massive misreporting resulted in loss of confidence in management - Failed to take into account the present value of a forward - Learn to investigate
Kidder Peabody
Where is risk coming from
Risk Management Irrelevance Proposition
APT in active portfolio management
40. Excess return divided by portfolio beta Tp = (E(Rp) - Rf)/portfolio beta - Better for well diversified portfolios
Risk- adjusted performance measure (RAP)
Volatility Market risk
Treynor measure
Settlement risk
41. Std dev between portfolio return and benchmark return TE = std dev * (Rp- Rb) - Benchmark funds
Debt overhang
Tracking error
Efficient frontier
Practical considerations related to ERM implementatio
42. Equilibrium can still be expressed in returns - covariance - and variance - but they become complex weighted averages
Ways firms can fail to account for risks
Effect of heterogeneous expectations on CAPM
Capital market line (CML)
Contango
43. Quantile of an empirical distribution
Nonparametric VaR
Ri = Rz + (gamma)(beta)
CAPM assumption for EMH
VaR - Value at Risk
44. Losses due to market activities ex. Interest rate changes or defaults
Financial risks
Four major types of risk
Business risks
Ways risk can be mismeasured
45. 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
Expected return of two assets
Correlation coefficient effect on diversification
Probability of ruin
Nonparametric VaR
46. Probability that a random variable falls below a specified threshold level
Shortfall risk
Business risks
Efficient frontier
Parametric VaR
47. Asses firm risks - Communicate risks - Manage and monitor risks
Roles of risk management
Settlement risk
Barings
Effect of heterogeneous expectations on CAPM
48. Firms became multinational - - >watched xchange rates more - deregulation and globalization
Firms becoming more sensitive to changes(bank deregulation)
APT for passive portfolio management
Ten assumptions underlying CAPM
Ways firms can fail to account for risks
49. The need to hedge against risks - for firms need to speculate.
Risk Management Irrelevance Proposition
What lead to the exponential growth to derivatives mkt?
Market risk
APT (equation and assumptions)
50. Potential amount that can be lost
Volatility Market risk
Solve for minimum variance portfolio
Recovery rate
Exposure