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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. Interest rate movements - derivatives - defaults






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






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






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






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






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






7. Quantile of an empirical distribution






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






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






10. Future price is greater than the spot price






11. Both probability and cost of tail events are considered






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






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






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






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






16. ex. Human capital - Equilibrium return can be higher or lower than it is under standard CAPM






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






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






19. 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






20. 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






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






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






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






24. 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






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






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






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






28. Occurs the day when two parties exchange payments same day






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






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






31. 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 -






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






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






34. Gamma = market price of the consumption beta - Beta = E(r) of zero consumption beta






35. Firm may ignore known risk - Somebody in firm may know about risk - but it's not captured by models - Realization of a truly unknown risk






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






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






38. Strategic risk - Business risk - Reputational risk






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






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






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






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






43. 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






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






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






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






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






49. 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






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