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






2. Strategic risk - Business risk - Reputational risk






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






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






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






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






7. 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


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






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






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






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






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






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






14. CAPM requires the strong form of the Efficient Market Hypothesis = private information






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






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






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






18. Both probability and cost of tail events are considered






19. Asset-liability/market-liquidity risk






20. Changes in vol - implied or actual






21. The need to hedge against risks - for firms need to speculate.






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






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






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






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






26. 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






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






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






29. 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






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






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






32. 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






33. Return is linearly related to growth rate in consumption






34. 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






35. Hazard - Financial - Operational - Strategic






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






37. 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






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






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






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






41. Quantile of a statistical distribution






42. 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.






43. 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






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






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






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






47. 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






48. Wrong distribution - Historical sample may not apply






49. 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






50. 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