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






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






3. Market risk - Liquidity risk - Credit risk - Operational risk






4. Rp = XaRa + XbRb






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






6. Make common factor beta - Build optimal portfolios - Judge valuation of securities - Track an index but enhance with stock selection






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






8. Future price is greater than the spot price






9. 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






10. Changes in vol - implied or actual






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






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






13. Both probability and cost of tail events are considered






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






15. People risk = fraud - etc. - Model risk = flawed valuation models - Legal risk = exposure to fines and lawsuits






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






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






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






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






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






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






22. Volatility of unexpected outcomes






23. 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






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






25. 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






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






27. Multibeta CAPM Ri - Rf =






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






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






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






31. Strategic risk - Business risk - Reputational risk






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






33. 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






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






35. 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






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






37. Potential amount that can be lost






38. Return is linearly related to growth rate in consumption






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






40. Quantile of an empirical distribution






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






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






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






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






45. 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






46. Hazard - Financial - Operational - Strategic






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


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






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






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