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






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






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






4. Both probability and cost of tail events are considered






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






6. Potential amount that can be lost






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. Absolute and relative risk - direction and non-directional






9. Quantile of a statistical distribution






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






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






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






13. 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






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

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






16. 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






17. 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






18. Credit risk that occurs when there is a change in the counterparty's ability to perform its obligations






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






20. 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






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






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






23. Hazard - Financial - Operational - Strategic






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






25. Proportion of loss that is recovered - Also referred to as "cents on the dollar"






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






27. 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






28. Changes in vol - implied or actual






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






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






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






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






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






34. Quantile of an empirical distribution






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






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






37. Market risk - Liquidity risk - Credit risk - Operational risk






38. 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






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






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






41. Multibeta CAPM Ri - Rf =






42. Return is linearly related to growth rate in consumption






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






44. 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






45. Strategic risk - Business risk - Reputational risk






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






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






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






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






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