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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. 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






2. Wrong distribution - Historical sample may not apply






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






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






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






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






7. Volatility of unexpected outcomes






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


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






10. Potential amount that can be lost






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






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






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






14. 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






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






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






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






18. Rp = XaRa + XbRb






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






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






21. 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






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






23. 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.






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






25. Market risk - Liquidity risk - Credit risk - Operational risk






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






27. Quantile of an empirical distribution






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






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






30. Multibeta CAPM Ri - Rf =






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






32. 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






33. Asses firm risks - Communicate risks - Manage and monitor risks






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






35. 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






36. Asset-liability/market-liquidity risk






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






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






39. Too much debt - Causes shareholders to seek projects that create short term capital but long term losses






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






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






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






43. Interest rate movements - derivatives - defaults






44. 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






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






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






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






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






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






50. 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