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






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






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






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






5. ex. Human capital - Equilibrium return can be higher or lower than it is under standard CAPM






6. 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






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






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






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






10. 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






11. Rp = XaRa + XbRb






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






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






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






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






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






17. Future price is greater than the spot price






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






19. 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






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






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






22. 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






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






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






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






26. 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






27. Wrong distribution - Historical sample may not apply






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






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






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






31. Market risk - Liquidity risk - Credit risk - Operational risk






32. 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






33. Volatility of unexpected outcomes






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






35. 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






36. Quantile of an empirical distribution






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






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






39. Interest rate movements - derivatives - defaults






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






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






42. Cannot exit position in market due to size of the position






43. 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.






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






45. Asset-liability/market-liquidity risk






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

Warning: Invalid argument supplied for foreach() in /var/www/html/basicversity.com/show_quiz.php on line 183


47. Quantile of a statistical distribution






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






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






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