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






2. Potential amount that can be lost






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






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






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






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






7. Volatility of unexpected outcomes






8. Rp = XaRa + XbRb






9. 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






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






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. 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






13. Multibeta CAPM Ri - Rf =






14. Strategic risk - Business risk - Reputational risk






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






16. Changes in vol - implied or actual






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






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






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






20. Both probability and cost of tail events are considered






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






22. Covariance = correlation coefficient std dev(a) std dev(b)






23. Future price is greater than the spot price






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






25. Quantile of a statistical distribution






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






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






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






29. 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






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






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






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






33. 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






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






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






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






37. 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






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






39. 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






40. Prices of risk are common factors and do not change - Sensitivities can change






41. Law of one price - Homogeneous expectations - Security returns process






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






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






44. 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






45. Return is linearly related to growth rate in consumption






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






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






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






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






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