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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. Return is linearly related to growth rate in consumption






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






4. Security is a financial claim issued to raise capital - Primary securities are backed by real assets - Secondary securities are backed by primary securities






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






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






7. Multibeta CAPM Ri - Rf =






8. 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






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






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






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






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






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






14. 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






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






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






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






18. Volatility of unexpected outcomes






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






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






21. Potential amount that can be lost






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






23. 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.






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






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






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






27. Hazard - Financial - Operational - Strategic






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






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






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






31. 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






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






33. 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






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






35. Future price is greater than the spot price






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






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






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






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






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






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






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






43. 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






44. Strategic risk - Business risk - Reputational risk






45. 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 -






46. 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






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






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






49. Quantile of an empirical distribution






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