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






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






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






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






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






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






7. 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






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






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






10. Hazard - Financial - Operational - Strategic






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






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






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






14. Long in options = expecting volatility increase - Short in options = expecting volatility decrease






15. Rp = XaRa + XbRb






16. Changes in vol - implied or actual






17. People risk = fraud - etc. - Model risk = flawed valuation models - Legal risk = exposure to fines and lawsuits






18. 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






19. RM cannot increase firm value when it costs the same to bear a risk w/in the firm or outside the firm - For RM to increase firm value it must be more expensive to bear risks internally than to pay capital markets to bear them.






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






21. Risk replaced with VaR (Portfolio return - risk free rate)/(portfolio VaR/initial value of portfolio)






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






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






24. Wrong distribution - Historical sample may not apply






25. 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






26. 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






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






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






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






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






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






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






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






34. 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






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

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






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






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






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






40. 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






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






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






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






44. 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






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






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






47. Potential amount that can be lost






48. 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






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






50. 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






Can you answer 50 questions in 15 minutes?



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