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FRM: Foundations Of Risk Management

Instructions:
  • Answer 50 questions in 15 minutes.
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  • Match each statement with the correct term.
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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. When negative taxable income is moved to a different year to offset future or past taxable income






2. Asset-liability/market-liquidity risk






3. 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






4. 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






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






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






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






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






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






10. Quantile of a statistical distribution






11. Security is a financial claim issued to raise capital - Primary securities are backed by real assets - Secondary securities are backed by primary securities






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






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






14. 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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15. 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






16. 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.






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






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






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






20. Quantile of an empirical distribution






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






22. Hazard - Financial - Operational - Strategic






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






24. Future price is greater than the spot price






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






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






27. 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






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






29. Both probability and cost of tail events are considered






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






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






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






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






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






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






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






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






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






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






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






41. Leeson took large speculative position in Nikkei 225 disguised as safe transactions by fake customers - Earthquake increased volatility and destroyed short put options - Losses of 1.25 billion and forced bankruptcy - Necessity of an independent tradi






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






43. 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






44. Market risk - Liquidity risk - Credit risk - Operational risk






45. Potential amount that can be lost






46. Rp = XaRa + XbRb






47. 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






48. Multibeta CAPM Ri - Rf =






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






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







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