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






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






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






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






5. 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






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






7. Quantile of an empirical distribution






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






9. 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






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






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






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






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






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






15. Future price is greater than the spot price






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






17. 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






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






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






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






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






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






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






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






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






26. Interest rate movements - derivatives - defaults






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






28. Changes in vol - implied or actual






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






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






31. 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.






32. Quantile of a statistical distribution






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

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






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






37. Volatility of unexpected outcomes






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






39. Hazard - Financial - Operational - Strategic






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






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






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






43. Rp = XaRa + XbRb






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






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






46. 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






47. 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






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






49. 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 -






50. 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