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






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






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






4. 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






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






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






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






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






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






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






12. 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






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






14. 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.






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






16. Quantile of a statistical distribution






17. Both probability and cost of tail events are considered






18. Multibeta CAPM Ri - Rf =






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






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






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






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






23. 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






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






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






26. Interest rate movements - derivatives - defaults






27. 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






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






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






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






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






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






33. 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






34. Return is linearly related to growth rate in consumption






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






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






37. 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






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






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






40. Strategic risk - Business risk - Reputational risk






41. Volatility of unexpected outcomes






42. 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






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






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






45. Changes in vol - implied or actual






46. Rp = XaRa + XbRb






47. Human - created: business cycles - inflation - govt policy changes - wars - Natural: weather - quakes






48. Asset-liability/market-liquidity risk






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






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