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






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






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






4. 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






5. 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

Warning: Invalid argument supplied for foreach() in /var/www/html/basicversity.com/show_quiz.php on line 183


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






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






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






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






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






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






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






13. Probability that a random variable falls below a specified threshold level






14. 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






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






16. 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






17. 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






18. 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






19. Xmvp = ((variance of b) - covariance)/((variance of a) + (variance of b) - 2 * covariance)






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






21. Interest rate movements - derivatives - defaults






22. Ri = Rz + (Rm - Rz)*beta - Rz = return on zero- beta portfolio






23. 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






24. 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






25. Hazard - Financial - Operational - Strategic






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






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






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






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






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






31. Covariance = correlation coefficient std dev(a) std dev(b)






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






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






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






35. 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






36. 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






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






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






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






40. 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






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






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






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






44. Return is linearly related to growth rate in consumption






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






46. Both probability and cost of tail events are considered






47. Changes in vol - implied or actual






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






49. 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 -






50. Equilibrium can still be expressed in returns - covariance - and variance - but they become complex weighted averages