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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. 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






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






3. Potential amount that can be lost






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






5. 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






6. Quantile of a statistical distribution






7. Volatility of unexpected outcomes






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






9. E(Ri) = Rf + beta[(E(Rm)- Rf)- (tax factor)(dividend yield for market - Rf)] + (tax factor)(dividend yield for stock - Rf)






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






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






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






13. 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






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






15. Market risk - Liquidity risk - Credit risk - Operational risk






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






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






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






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






20. Multibeta CAPM Ri - Rf =






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






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






23. Volatility of expected outcomes - Outcomes are random but distribution is known or approximated






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






25. 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






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






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






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






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






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






31. Economic Cost of Ruin(ECOR) - Enhancement to probability of ruin where severity of ruin is reflected






32. 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






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






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






35. 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






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






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






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






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






40. 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






41. 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.






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






43. 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






44. Return is linearly related to growth rate in consumption






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






46. 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






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






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






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






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