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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. 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






2. 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






3. Changes in vol - implied or actual






4. 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






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






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






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






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






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






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






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






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






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






14. 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






15. Return is linearly related to growth rate in consumption






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






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






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






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






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






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






23. Multibeta CAPM Ri - Rf =






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






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






26. Quantile of a statistical distribution






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

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28. Leeson took large speculative position in Nikkei 225 disguised as safe transactions by fake customers - Earthquake increased volatility and destroyed short put options - Losses of 1.25 billion and forced bankruptcy - Necessity of an independent tradi






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






30. 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






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






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






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






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






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






36. Hazard - Financial - Operational - Strategic






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






38. Quantile of an empirical distribution






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






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






41. 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






42. Potential amount that can be lost






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






44. 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






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






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






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






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






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






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