SUBJECTS
|
BROWSE
|
CAREER CENTER
|
POPULAR
|
JOIN
|
LOGIN
Business Skills
|
Soft Skills
|
Basic Literacy
|
Certifications
About
|
Help
|
Privacy
|
Terms
|
Email
Search
Test your basic knowledge |
FRM: Foundations Of Risk Management
Start Test
Study First
Subjects
:
business-skills
,
certifications
,
frm
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. Interest rate movements - derivatives - defaults
Derivative contract
Financial Risk
Basis risk
Firms becoming more sensitive to changes(bank deregulation)
2. Concave function that extends from minimum variance portfolio to maximum return portfolio
Allied Irish Bank
Efficient frontier
Business risks
Sovereign risk
3. Human - created: business cycles - inflation - govt policy changes - wars - Natural: weather - quakes
Barings
Credit event
Where is risk coming from
Solvency-related metrics
4. E(Ri) = Rf + beta[(E(Rm)- Rf)- (tax factor)(dividend yield for market - Rf)] + (tax factor)(dividend yield for stock - Rf)
CAPM with taxes included (equation)
Probability of ruin
Operational risk
Practical considerations related to ERM implementatio
5. Misleading reporting (incorrect market info) - Due to large market moves - Due to conduct of customer business
Parametric VaR
Three main reasons for financial disasters
Risks excluded from operational risk
Tracking error
6. Market risk - Liquidity risk - Credit risk - Operational risk
Ways risk can be mismeasured
Four major types of risk
Basis risk
BTR - Below Target Risk
7. Quantile of an empirical distribution
Nonparametric VaR
Tail VaR or TCE - Tail Conditional Expectation(TCE)
Exposure
Business risks
8. Relative portfolio risk (RRiskp) - Based on a one- month investment period
Solve for minimum variance portfolio
APT for passive portfolio management
Nonparametric VaR
RAR = relative return of portfolio (RRp)
9. Sqrt((Xa^2)(variance of a) + (1- Xa)^2(variance of b) + 2(Xa)(1- Xa)(covariance))
Solvency-related metrics
Standard deviation of two assets
Security (primary vs secondary)
Ways firms can fail to account for risks
10. Future price is greater than the spot price
Business risks
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
Contango
Risk
11. Both probability and cost of tail events are considered
EPD or ECOR - Expected Policyholder Deficit (EPD)
Tail VaR or TCE - Tail Conditional Expectation(TCE)
Kidder Peabody
Four major types of risk
12. Inability to make payment obligations (ex. Margin calls)
Standard deviation of two assets
Forms of Market risk
Basis risk
Funding liquidity risk
13. Probability that a random variable falls below a specified threshold level
Capital market line (CML)
Risks excluded from operational risk
Shortfall risk
Ri = ai + bi1l1 + bi2l2....+ei
14. Std dev between portfolio return and benchmark return TE = std dev * (Rp- Rb) - Benchmark funds
What lead to the exponential growth to derivatives mkt?
Tracking error
Contango
Exposure
15. The need to hedge against risks - for firms need to speculate.
What lead to the exponential growth to derivatives mkt?
Nonparametric VaR
Effect of non- price- taking behavior on CAPM
Business Risk
16. ex. Human capital - Equilibrium return can be higher or lower than it is under standard CAPM
Risk Management Irrelevance Proposition
Models used in ERM framework
Three main reasons for financial disasters
Nonmarketable asset impact on CAPM
17. Concentrate on mid- region of probability distribution - Relevant to owners and proxies
Debt overhang
CAPM assumption for EMH
Contango
Performance- related metrics
18. Firms became multinational - - >watched xchange rates more - deregulation and globalization
Firms becoming more sensitive to changes(bank deregulation)
3 main types of operational risk
Morningstar Rating System
Effect of non- price- taking behavior on CAPM
19. 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
Performance- related metrics
LTCM
Treynor measure
Sortino ratio
20. 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
Tracking error
Operational risk
Drysdale Securities (Chase Manhattan)
CAPM (formula)
21. Need to assess risk and tell management so they can determine which risks to take on
3 main types of operational risk
Importance of communication for risk managers
Capital market line (CML)
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
22. Modeling approach is typically between statistical analytic models and structural simulation models
Models used in ERM framework
Risks excluded from operational risk
Allied Irish Bank
Treynor measure
23. Too much debt - Causes shareholders to seek projects that create short term capital but long term losses
VaR - Value at Risk
Security (primary vs secondary)
Asset liquidity risk
Debt overhang
24. 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
Options motivation on volatility
Solvency-related metrics
Capital market line (CML)
Carry- backs and carry- forwards
25. Risk of loses owing to movements in level or volatility of market prices
Market risk
Options motivation on volatility
Basis
Source of need for risk management
26. Capital structure (financial distress) - Taxes - Agency and information asymmetries
Ways risk can be mismeasured
Financial risks
Forms of Market risk
Market imperfections that can create value
27. Risk- adjusted rating (RAR) - Difference between relative returns and relative risk
Forms of Market risk
LTCM
Sharpe measure
Morningstar Rating System
28. Occurs the day when two parties exchange payments same day
Basis
Settlement risk
EPD or ECOR - Expected Policyholder Deficit (EPD)
Operational risk
29. Focus on adverse tail of distribution - Relevant for determining economic capital (EC) requirements
Solvency-related metrics
Credit event
Formula for covariance
Probability of ruin
30. IR = (E(Rp) - E(Rb))/(std dev(Rp- Rb)) - Evaluate manager of a benchmark fund
Information ratio
LTCM
Ways firms can fail to account for risks
Expected return of two assets
31. 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 -
Risk
3 main types of operational risk
Business Risk
Source of need for risk management
32. The uses of debt to fall into a lower tax rate
Tax shield
Kidder Peabody
Shape of portfolio possibilities curve
Options motivation on volatility
33. Asses firm risks - Communicate risks - Manage and monitor risks
Operational risk
Volatility Market risk
Risk types addressed by ERM
Roles of risk management
34. Gamma = market price of the consumption beta - Beta = E(r) of zero consumption beta
Ri = Rz + (gamma)(beta)
Financial risks
Security (primary vs secondary)
Prices of risk vs sensitivity
35. Firm may ignore known risk - Somebody in firm may know about risk - but it's not captured by models - Realization of a truly unknown risk
Ways firms can fail to account for risks
Kidder Peabody
Banker's Trust
Risk
36. Unanticipated movements in relative prices of assets in hedged position
Derivative contract
Asset liquidity risk
Basic Market risk
Asset transformers
37. Capital Asset Pricing Model Ri = Rf + beta*(Rm - Rf)
Jensen's alpha
Prices of risk vs sensitivity
Asset transformers
CAPM (formula)
38. Strategic risk - Business risk - Reputational risk
Ri = ai + bi1l1 + bi2l2....+ei
Risk Management Irrelevance Proposition
Risks excluded from operational risk
Exposure
39. Long in options = expecting volatility increase - Short in options = expecting volatility decrease
Models used in ERM framework
Risk Management Irrelevance Proposition
Options motivation on volatility
Multi- period version of CAPM
40. Relationship drawn from CML - RAP = [(market std dev)/(portfolio std dev)]*(Portfolio return - risk free rate) + risk free rate - annualized
Models used in ERM framework
Basic Market risk
Risk
Risk- adjusted performance measure (RAP)
41. Risks that are assumed willingly - to gain a competitive edge or add shareholder value
Business risks
CAPM assumption for EMH
Derivative contract
Morningstar Rating System
42. Losses due to market activities ex. Interest rate changes or defaults
Asset liquidity risk
Debt overhang
Importance of communication for risk managers
Financial risks
43. 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
Ten assumptions underlying CAPM
Zero- beta CAPM (two factor model)
Formula for covariance
BTR - Below Target Risk
44. Security is a financial claim issued to raise capital - Primary securities are backed by real assets - Secondary securities are backed by primary securities
APT in active portfolio management
Shortcomings of risk metrics
Security (primary vs secondary)
Effect of non- price- taking behavior on CAPM
45. Credit risk that occurs when there is a change in the counterparty's ability to perform its obligations
CAPM (formula)
Credit event
Banker's Trust
Debt overhang
46. The lower (closer to - 1) - the higher the payoff from diversification
Allied Irish Bank
Importance of communication for risk managers
Correlation coefficient effect on diversification
Contango
47. Difference between forward price and spot price - Should approach zero as the contract approaches maturity
Source of need for risk management
Liquidity risk
Traits of ERM
Basis
48. Derives value from an underlying asset - rate - or index - Derives value from a security
Derivative contract
Three main reasons for financial disasters
Debt overhang
Operational risk
49. 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
Jensen's alpha
Allied Irish Bank
Tail VaR or TCE - Tail Conditional Expectation(TCE)
Multi- period version of CAPM
50. Unanticipated movements in relative prices of assets in a hedged position - All hedges imply some basis risk
Forms of Market risk
Debt overhang
Basis risk
APT (equation and assumptions)