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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. Quantile of an empirical distribution






2. 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






3. Quantile of a statistical distribution






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






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






6. 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






7. 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






8. Interest rate movements - derivatives - defaults






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






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






11. 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






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






13. 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 -






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






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






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






17. Future price is greater than the spot price






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






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






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






21. 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






22. 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






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






24. 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






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






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






27. Rp = XaRa + XbRb






28. Hazard - Financial - Operational - Strategic






29. Potential amount that can be lost






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






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






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






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






34. Market risk - Liquidity risk - Credit risk - Operational risk






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






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






37. 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






38. Unanticipated movements in relative prices of assets in hedged position






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






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






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






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






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






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






45. 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






46. Wrong distribution - Historical sample may not apply






47. 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






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






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






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