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






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






3. Multibeta CAPM Ri - Rf =






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






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






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






7. Volatility of unexpected outcomes






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






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






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






11. 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






12. 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






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






14. Sold complex derivatives to Proctor & Gamble and Gibson - Were sued due to claims that they deceived buyers - Need for better controls for matching complexity of trade with client sophistication - Need for price quotes independent of front office Met

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15. 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






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






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






18. Asset-liability/market-liquidity risk






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






20. Potential amount that can be lost






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






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






23. Concave function that extends from minimum variance portfolio to maximum return portfolio






24. 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






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






26. 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






27. 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 -






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






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






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






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






32. Return is linearly related to growth rate in consumption






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






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






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






36. Market risk - Liquidity risk - Credit risk - Operational risk






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






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






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






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






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






42. 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






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






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






45. Changes in vol - implied or actual






46. Strategic risk - Business risk - Reputational risk






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






48. Wrong distribution - Historical sample may not apply






49. Quantile of an empirical distribution






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







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