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






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






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






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






5. 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.






6. Hazard - Financial - Operational - Strategic






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






8. 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






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






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






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






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






13. 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






14. Potential amount that can be lost






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






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






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






18. Volatility of unexpected outcomes






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






20. 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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21. Unanticipated movements in relative prices of assets in hedged position






22. Strategic risk - Business risk - Reputational risk






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






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






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






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






27. Asset-liability/market-liquidity risk






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






29. Quantile of an empirical distribution






30. Both probability and cost of tail events are considered






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






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






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






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






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






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






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






38. 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 -






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






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






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






42. 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






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






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






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






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






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






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






49. 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






50. Future price is greater than the spot price