SUBJECTS
|
BROWSE
|
CAREER CENTER
|
POPULAR
|
JOIN
|
LOGIN
Business Skills
|
Soft Skills
|
Basic Literacy
|
Certifications
About
|
Help
|
Privacy
|
Terms
|
Email
Search
Test your basic knowledge |
FRM: Foundations Of Risk Management
Start Test
Study First
Subjects
:
business-skills
,
certifications
,
frm
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. Excess return equated to alpha plus expected systematic return E(Rp) - Rf = alpha + beta(E(Rm) - Rf)
Warning
: Invalid argument supplied for foreach() in
/var/www/html/basicversity.com/show_quiz.php
on line
183
2. Risk of loses owing to movements in level or volatility of market prices
Prices of risk vs sensitivity
APT (equation and assumptions)
Market risk
Business risks
3. The need to hedge against risks - for firms need to speculate.
Effect of heterogeneous expectations on CAPM
What lead to the exponential growth to derivatives mkt?
Practical considerations related to ERM implementatio
Jensen's alpha
4. 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
Traits of ERM
Valuation vs. Risk management
Risk- adjusted performance measure (RAP)
Parametric VaR
5. 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
APT (equation and assumptions)
Ways firms can fail to account for risks
APT in active portfolio management
Capital market line (CML)
6. 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
Traits of ERM
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
Risk Management Irrelevance Proposition
LTCM
7. Modeling approach is typically between statistical analytic models and structural simulation models
Models used in ERM framework
Solvency-related metrics
APT in active portfolio management
Three main reasons for financial disasters
8. Human - created: business cycles - inflation - govt policy changes - wars - Natural: weather - quakes
Recovery rate
Debt overhang
Where is risk coming from
Information ratio
9. Future price is greater than the spot price
Shape of portfolio possibilities curve
Models used in ERM framework
Contango
Debt overhang
10. Rp = XaRa + XbRb
Financial Risk
Drysdale Securities (Chase Manhattan)
Expected return of two assets
Carry- backs and carry- forwards
11. Liquidity and maturity transformation - Brokers - Reduces transaction and information costs between households and corporations
Debt overhang
Roles of risk management
Asset transformers
Shape of portfolio possibilities curve
12. Return is linearly related to growth rate in consumption
Multi- period version of CAPM
Sovereign risk
Shortcomings of risk metrics
Probability of ruin
13. Firms became multinational - - >watched xchange rates more - deregulation and globalization
Capital market line (CML)
Firms becoming more sensitive to changes(bank deregulation)
Importance of communication for risk managers
Ri = ai + bi1l1 + bi2l2....+ei
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
Performance- related metrics
Liquidity risk
Business Risk
Ways risk can be mismeasured
15. Hazard - Financial - Operational - Strategic
Shape of portfolio possibilities curve
Nonmarketable asset impact on CAPM
Risk types addressed by ERM
APT (equation and assumptions)
16. 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
APT for passive portfolio management
Traits of ERM
CAPM assumption for EMH
Firms becoming more sensitive to changes(bank deregulation)
17. Covariance = correlation coefficient std dev(a) std dev(b)
Formula for covariance
Multi- period version of CAPM
Ways risk can be mismeasured
Settlement risk
18. 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
Market risk
APT (equation and assumptions)
Business risks
Ten assumptions underlying CAPM
19. 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 -
Jensen's alpha
Source of need for risk management
Operational risk
Settlement risk
20. Gamma = market price of the consumption beta - Beta = E(r) of zero consumption beta
Firms becoming more sensitive to changes(bank deregulation)
Drysdale Securities (Chase Manhattan)
Asset transformers
Ri = Rz + (gamma)(beta)
21. Equilibrium can still be expressed in returns - covariance - and variance - but they become complex weighted averages
Allied Irish Bank
Effect of heterogeneous expectations on CAPM
Risk
Correlation coefficient effect on diversification
22. Probability distribution is unknown (ex. A terrorist attack)
Traits of ERM
Recovery rate
APT for passive portfolio management
Uncertainty
23. Xmvp = ((variance of b) - covariance)/((variance of a) + (variance of b) - 2 * covariance)
Solve for minimum variance portfolio
Nonmarketable asset impact on CAPM
Debt overhang
Kidder Peabody
24. 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
Debt overhang
Financial Risk
Barings
Roles of risk management
25. 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
Risk
APT for passive portfolio management
Derivative contract
Drysdale Securities (Chase Manhattan)
26. Risks that are assumed willingly - to gain a competitive edge or add shareholder value
Business risks
Risk
CAPM (formula)
CAPM assumption for EMH
27. Returns on any stock are linearly related to a set of indexes
Risk types addressed by ERM
Practical considerations related to ERM implementatio
Ri = ai + bi1l1 + bi2l2....+ei
Operational risk
28. People risk = fraud - etc. - Model risk = flawed valuation models - Legal risk = exposure to fines and lawsuits
Barings
Zero- beta CAPM (two factor model)
3 main types of operational risk
VaR - Value at Risk
29. Cannot exit position in market due to size of the position
Asset liquidity risk
Tail VaR or TCE - Tail Conditional Expectation(TCE)
Prices of risk vs sensitivity
Information ratio
30. Volatility of unexpected outcomes
Risk
APT in active portfolio management
VaR- based analysis (formula)
Market risk
31. 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
Allied Irish Bank
LTCM
Zero- beta CAPM (two factor model)
Expected return of two assets
32. Both probability and cost of tail events are considered
Tail VaR or TCE - Tail Conditional Expectation(TCE)
Liquidity risk
Zero- beta CAPM (two factor model)
Derivative contract
33. Potential amount that can be lost
APT in active portfolio management
Solve for minimum variance portfolio
Funding liquidity risk
Exposure
34. Std dev between portfolio return and benchmark return TE = std dev * (Rp- Rb) - Benchmark funds
CAPM assumption for EMH
Tracking error
Risk
Banker's Trust
35. ex. Human capital - Equilibrium return can be higher or lower than it is under standard CAPM
Nonmarketable asset impact on CAPM
Prices of risk vs sensitivity
Asset liquidity risk
Jensen's alpha
36. Prices of risk are common factors and do not change - Sensitivities can change
Sortino ratio
Prices of risk vs sensitivity
APT for passive portfolio management
Expected return of two assets
37. Country specific - Foreign exchange controls that prohibit counterparty's obligations
Sovereign risk
Solvency-related metrics
Ways firms can fail to account for risks
Settlement risk
38. Expected value of unfavorable deviations of a random variable from a specified target level
BTR - Below Target Risk
Barings
APT in active portfolio management
CAPM with taxes included (equation)
39. Inability to make payment obligations (ex. Margin calls)
Funding liquidity risk
Shape of portfolio possibilities curve
Business Risk
Nonmarketable asset impact on CAPM
40. Ri = Rz + (Rm - Rz)*beta - Rz = return on zero- beta portfolio
Zero- beta CAPM (two factor model)
Shortfall risk
Models used in ERM framework
Debt overhang
41. Strategic risk - Business risk - Reputational risk
Volatility Market risk
Basis risk
Risks excluded from operational risk
RAR = relative return of portfolio (RRp)
42. Excess return divided by portfolio beta Tp = (E(Rp) - Rf)/portfolio beta - Better for well diversified portfolios
Treynor measure
Derivative contract
Basis risk
Debt overhang
43. Too much debt - Causes shareholders to seek projects that create short term capital but long term losses
Debt overhang
Basis
Shape of portfolio possibilities curve
LTCM
44. The uses of debt to fall into a lower tax rate
Debt overhang
Security (primary vs secondary)
Tax shield
Practical considerations related to ERM implementatio
45. 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
Kidder Peabody
Correlation coefficient effect on diversification
Barings
Models used in ERM framework
46. IR = (E(Rp) - E(Rb))/(std dev(Rp- Rb)) - Evaluate manager of a benchmark fund
Kidder Peabody
Ri = Rz + (gamma)(beta)
Information ratio
EPD or ECOR - Expected Policyholder Deficit (EPD)
47. Difference between forward price and spot price - Should approach zero as the contract approaches maturity
Roles of risk management
Market risk
Basis
Practical considerations related to ERM implementatio
48. E(Ri) = Rf + beta[(E(Rm)- Rf)- (tax factor)(dividend yield for market - Rf)] + (tax factor)(dividend yield for stock - Rf)
Tail VaR or TCE - Tail Conditional Expectation(TCE)
Shape of portfolio possibilities curve
CAPM with taxes included (equation)
Basis
49. Probability that a random variable falls below a specified threshold level
Market risk
Shortfall risk
Business risks
Jensen's alpha
50. Concentrate on mid- region of probability distribution - Relevant to owners and proxies
Basis risk
Performance- related metrics
BTR - Below Target Risk
Practical considerations related to ERM implementatio