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






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






3. Sold complex derivatives to Proctor & Gamble and Gibson - Were sued due to claims that they deceived buyers - Need for better controls for matching complexity of trade with client sophistication - Need for price quotes independent of front office Met

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






5. Volatility of unexpected outcomes






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






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






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






9. 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






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






11. Proportion of loss that is recovered - Also referred to as "cents on the dollar"






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






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






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






15. 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






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






17. Managing risks is a core activity at financial companies - Industrial companies hedge financial risks






18. 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






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






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






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. Asset-liability/market-liquidity risk






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

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24. Hazard - Financial - Operational - Strategic






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






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






27. Multibeta CAPM Ri - Rf =






28. 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






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






30. Quantile of a statistical distribution






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






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






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






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






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






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






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






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






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






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






41. Market risk - Liquidity risk - Credit risk - Operational risk






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






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






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






45. Interest rate movements - derivatives - defaults






46. 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






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






48. Both probability and cost of tail events are considered






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






50. 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