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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. 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






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

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






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






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






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






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






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






9. 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 -






10. Return is linearly related to growth rate in consumption






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






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






13. Hazard - Financial - Operational - Strategic






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






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






16. 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






17. Changes in vol - implied or actual






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






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






20. Rp = XaRa + XbRb






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






22. Summarizes the worst loss over a period that will not be exceeded by a given level of confidence - Always one tailed






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






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






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






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






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






28. Asset-liability/market-liquidity risk






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






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






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






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






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






34. Wrong distribution - Historical sample may not apply






35. Multibeta CAPM Ri - Rf =






36. Absolute and relative risk - direction and non-directional






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






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






39. Both probability and cost of tail events are considered






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






41. Strategic risk - Business risk - Reputational risk






42. Quantile of a statistical distribution






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






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






45. 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

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






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






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






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