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






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






3. 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






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






5. Strategic risk - Business risk - Reputational risk






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






7. Interest rate movements - derivatives - defaults






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






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






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






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






12. 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






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

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






15. 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






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






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






19. Potential amount that can be lost






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






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






22. Expected value of unfavorable deviations of a random variable from a specified target level






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






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






25. Quantile of a statistical distribution






26. 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






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






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






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






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






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






32. Future price is greater than the spot price






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






34. 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.






35. 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 -






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






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






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






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






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






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






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






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






44. Volatility of unexpected outcomes






45. Law of one price - Homogeneous expectations - Security returns process






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






47. 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






48. Wrong distribution - Historical sample may not apply






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






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