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






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






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






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






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






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






7. Wrong distribution - Historical sample may not apply






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






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






10. 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






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

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12. 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






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






14. 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






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






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






17. Changes in vol - implied or actual






18. 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






19. Quantile of an empirical distribution






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






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






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






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






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






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






26. Quantile of a statistical distribution






27. 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






28. 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






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






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






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






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






34. Both probability and cost of tail events are considered






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






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






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






38. Future price is greater than the spot price






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






40. 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.






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






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






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






44. Asset-liability/market-liquidity risk






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






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






47. Return is linearly related to growth rate in consumption






48. 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






49. 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






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