Test your basic knowledge |

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






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






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






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






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






6. 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






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






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






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






10. Loss resulting from inadequate/failed internal processes - people or systems - back-office problems - settlement - etc - reconciliation






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






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






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






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






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






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






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






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






20. Changes in vol - implied or actual






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






22. Wrong distribution - Historical sample may not apply






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






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






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






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






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






28. 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

Warning: Invalid argument supplied for foreach() in /var/www/html/basicversity.com/show_quiz.php on line 183


29. Potential amount that can be lost






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

Warning: Invalid argument supplied for foreach() in /var/www/html/basicversity.com/show_quiz.php on line 183


31. Hazard - Financial - Operational - Strategic






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






33. 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.






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






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






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






37. 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 -






38. 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






39. Quantile of a statistical distribution






40. Return is linearly related to growth rate in consumption






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






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






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






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






46. Future price is greater than the spot price






47. 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






48. Strategic risk - Business risk - Reputational risk






49. 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






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