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






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






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






4. 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






5. Future price is greater than the spot price






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






7. Both probability and cost of tail events are considered






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






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






10. 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






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






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






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






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






15. 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 -






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






17. Hazard - Financial - Operational - Strategic






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






19. 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






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






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






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






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






24. Rp = XaRa + XbRb






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






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






27. Return is linearly related to growth rate in consumption






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






29. Potential amount that can be lost






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






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






32. 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






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






34. Valuation focuses on mean of distribution vs risk mgmt focuses on potential variation in payoffs - needs more precision for pricing - VAR doesn't b/c noise cancels out






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






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






37. 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






38. Multibeta CAPM Ri - Rf =






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






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






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






42. Quantile of a statistical distribution






43. Asset-liability/market-liquidity risk






44. Quantile of an empirical distribution






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






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






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






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






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






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