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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.
  • 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. Designate ERM champion - usually CRO - Make ERM part of firm culture - Determining all possible risks - Quantifying operational and strategic risks - Integrating risks (dependencies) - Lack of risk transfer mechanisms - Monitoring






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






3. 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 -






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






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






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






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






8. 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






9. Quantile of a statistical distribution






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






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






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






13. Potential amount that can be lost






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






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






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






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






18. 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






19. Absolute and relative risk - direction and non-directional






20. Asset-liability/market-liquidity risk






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






22. 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






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






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






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






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






27. 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






28. Wrong distribution - Historical sample may not apply






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






30. Multibeta CAPM Ri - Rf =






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






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






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






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






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






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






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






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






39. Quantile of an empirical distribution






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






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






42. Volatility of unexpected outcomes






43. 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






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






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






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






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






49. Both probability and cost of tail events are considered






50. Hazard - Financial - Operational - Strategic