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. Asses firm risks - Communicate risks - Manage and monitor risks






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






3. 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






4. 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






5. Market risk - Liquidity risk - Credit risk - Operational risk






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






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






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






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






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






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






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






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






14. Modeling approach is typically between statistical analytic models and structural simulation models






15. 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


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






17. Interest rate movements - derivatives - defaults






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






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






20. 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






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






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






23. 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






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






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






26. 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






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






28. Returns on any stock are linearly related to a set of indexes






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






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






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






32. Managing risks is a core activity at financial companies - Industrial companies hedge financial risks






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






34. Wrong distribution - Historical sample may not apply






35. 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.






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






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






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






39. 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






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






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






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






43. Multibeta CAPM Ri - Rf =






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






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






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






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






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






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






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