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FRM: Foundations Of Risk Management

Instructions:
  • Answer 50 questions in 15 minutes.
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  • 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. Excess return divided by portfolio volatility (std dev) Sp = (E(Rp) - Rf)/(std dev of Rp) - Better for non- diversified portfolios






2. Rp = XaRa + XbRb






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






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






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






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






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






8. 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






9. 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






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






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






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






13. Wrong distribution - Historical sample may not apply






14. 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






15. Sqrt((Xa^2)(variance of a) + (1- Xa)^2(variance of b) + 2(Xa)(1- Xa)(covariance))






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






17. 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






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






19. Potential amount that can be lost






20. 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






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






22. Return is linearly related to growth rate in consumption






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






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






25. Volatility of unexpected outcomes






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






27. Capital structure (financial distress) - Taxes - Agency and information asymmetries






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






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






30. Hazard - Financial - Operational - Strategic






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






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






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






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






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






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






37. 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






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






39. Future price is greater than the spot price






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






41. Human - created: business cycles - inflation - govt policy changes - wars - Natural: weather - quakes






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






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






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






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






46. 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






47. 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






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






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






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






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