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FRM: Foundations Of Risk Management

Instructions:
  • Answer 50 questions in 15 minutes.
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  • 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. Firms became multinational - - >watched xchange rates more - deregulation and globalization






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






3. 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






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






5. 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






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






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






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






10. Quantile of a statistical distribution






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






12. 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






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






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






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






16. 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






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






18. 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






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






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






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






22. 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






23. Make common factor beta - Build optimal portfolios - Judge valuation of securities - Track an index but enhance with stock selection






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






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






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






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






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






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






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






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






33. Asset-liability/market-liquidity risk






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






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






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






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






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






39. 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






40. Return is linearly related to growth rate in consumption






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






42. 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






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






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






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






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






47. 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






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






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






50. Efficient frontier with inclusion of risk free rate - Straight line with formula Rc = Rf + ((Ra - Rf)/std dev(a))*std dev(c) - c is the total portfolio - a is the risky asset






Can you answer 50 questions in 15 minutes?



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