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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. 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 -






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






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






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. 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






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






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






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






9. 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






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






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






12. Hazard - Financial - Operational - Strategic






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






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






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






16. Changes in vol - implied or actual






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






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






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






20. Interest rate movements - derivatives - defaults






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






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






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






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

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






26. Difference between forward price and spot price - Should approach zero as the contract approaches maturity






27. 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






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






30. Quantile of a statistical distribution






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






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






33. Modeling approach is typically between statistical analytic models and structural simulation models






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






35. Potential amount that can be lost






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






37. Future price is greater than the spot price






38. 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






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






40. People risk = fraud - etc. - Model risk = flawed valuation models - Legal risk = exposure to fines and lawsuits






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






42. Multibeta CAPM Ri - Rf =






43. Rp = XaRa + XbRb






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






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






46. 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






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






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






49. Occurs the day when two parties exchange payments same day






50. 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