## 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. Cannot exit position in market due to size of the position**

**2. Probability distribution is unknown (ex. A terrorist attack)**

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

**4. 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**

**5. Future price is greater than the spot price**

**6. Unanticipated movements in relative prices of assets in hedged position**

**7. Both probability and cost of tail events are considered**

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

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

**10. 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**

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

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

**13. Probability that a random variable falls below a specified threshold level**

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

**15. 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 -**

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

**17. Hazard - Financial - Operational - Strategic**

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

**19. 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**

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

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

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

**23. Too much debt - Causes shareholders to seek projects that create short term capital but long term losses**

**24. Rp = XaRa + XbRb**

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

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

**27. Return is linearly related to growth rate in consumption**

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

**29. Potential amount that can be lost**

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

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

**32. 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**

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

**34. 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**

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

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

**37. 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**

**38. Multibeta CAPM Ri - Rf =**

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

**40. Occurs the day when two parties exchange payments same day**

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

**42. Quantile of a statistical distribution**

**43. Asset-liability/market-liquidity risk**

**44. Quantile of an empirical distribution**

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

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

**47. Law of one price - Homogeneous expectations - Security returns process**

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

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

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