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






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






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






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






5. 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






6. 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






7. Too much debt - Causes shareholders to seek projects that create short term capital but long term losses






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






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






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






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






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. Quantile of a statistical distribution






14. 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






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






16. Quantile of an empirical distribution






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






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






19. Multibeta CAPM Ri - Rf =






20. 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






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






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






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






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






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






26. Volatility of unexpected outcomes






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






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






29. Wrong distribution - Historical sample may not apply






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






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






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






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






34. 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






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






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






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






38. Changes in vol - implied or actual






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






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. 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






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






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






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






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






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






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






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






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