SUBJECTS
|
BROWSE
|
CAREER CENTER
|
POPULAR
|
JOIN
|
LOGIN
Business Skills
|
Soft Skills
|
Basic Literacy
|
Certifications
About
|
Help
|
Privacy
|
Terms
|
Email
Search
Test your basic knowledge |
FRM: Foundations Of Risk Management
Start Test
Study First
Subjects
:
business-skills
,
certifications
,
frm
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. Security is a financial claim issued to raise capital - Primary securities are backed by real assets - Secondary securities are backed by primary securities
Ways firms can fail to account for risks
Security (primary vs secondary)
Probability of ruin
Standard deviation of two assets
2. People risk = fraud - etc. - Model risk = flawed valuation models - Legal risk = exposure to fines and lawsuits
Basis
3 main types of operational risk
Differences in financial risk management for financial companies vs industrial companies
Capital market line (CML)
3. Losses due to market activities ex. Interest rate changes or defaults
Financial risks
Ways risk can be mismeasured
Market imperfections that can create value
Basis risk
4. Make common factor beta - Build optimal portfolios - Judge valuation of securities - Track an index but enhance with stock selection
APT in active portfolio management
What lead to the exponential growth to derivatives mkt?
Derivative contract
Capital market line (CML)
5. Credit risk that occurs when there is a change in the counterparty's ability to perform its obligations
Risk
APT in active portfolio management
Credit event
Probability of ruin
6. Unanticipated movements in relative prices of assets in hedged position
Banker's Trust
Basic Market risk
Settlement risk
Sharpe measure
7. IR = (E(Rp) - E(Rb))/(std dev(Rp- Rb)) - Evaluate manager of a benchmark fund
Information ratio
3 main types of operational risk
Standard deviation of two assets
Ri = ai + bi1l1 + bi2l2....+ei
8. Return is linearly related to growth rate in consumption
Volatility Market risk
3 main types of operational risk
Multi- period version of CAPM
Derivative contract
9. 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
Roles of risk management
Security (primary vs secondary)
Capital market line (CML)
Derivative contract
10. When firm has so much debt that it leads to making investment decisions that benefit shareholdser but affect total firm value adversely
Debt overhang
Information ratio
Volatility Market risk
Settlement risk
11. Occurs the day when two parties exchange payments same day
Shortcomings of risk metrics
Debt overhang
EPD or ECOR - Expected Policyholder Deficit (EPD)
Settlement risk
12. Simple form of CAPM - but market price of risk is lower than if all investors were price takers
Contango
Expected return of two assets
Effect of non- price- taking behavior on CAPM
Recovery rate
13. The uses of debt to fall into a lower tax rate
Settlement risk
Tax shield
RAR = relative return of portfolio (RRp)
Three main reasons for financial disasters
14. Concave function that extends from minimum variance portfolio to maximum return portfolio
Efficient frontier
Ri = ai + bi1l1 + bi2l2....+ei
Tracking error
Risks excluded from operational risk
15. Relationship drawn from CML - RAP = [(market std dev)/(portfolio std dev)]*(Portfolio return - risk free rate) + risk free rate - annualized
Risk- adjusted performance measure (RAP)
CAPM with taxes included (equation)
Shortfall risk
Risk
16. Cannot exit position in market due to size of the position
Asset liquidity risk
Volatility Market risk
Financial Risk
Formula for covariance
17. Managing risks is a core activity at financial companies - Industrial companies hedge financial risks
Traits of ERM
APT in active portfolio management
Differences in financial risk management for financial companies vs industrial companies
Shape of portfolio possibilities curve
18. Absolute and relative risk - direction and non-directional
Options motivation on volatility
Three main reasons for financial disasters
Forms of Market risk
Risk
19. Returns on any stock are linearly related to a set of indexes
Contango
Operational risk
Ri = ai + bi1l1 + bi2l2....+ei
Uncertainty
20. Both probability and cost of tail events are considered
Formula for covariance
APT in active portfolio management
Tail VaR or TCE - Tail Conditional Expectation(TCE)
Ri = Rz + (gamma)(beta)
21. 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
Contango
Probability of ruin
Drysdale Securities (Chase Manhattan)
3 main types of operational risk
22. 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 -
Nonmarketable asset impact on CAPM
Source of need for risk management
Business Risk
Financial Risk
23. Long in options = expecting volatility increase - Short in options = expecting volatility decrease
Capital market line (CML)
Debt overhang
Options motivation on volatility
Tax shield
24. Strategic risk - Business risk - Reputational risk
Capital market line (CML)
Treynor measure
Formula for covariance
Risks excluded from operational risk
25. Too much debt - Causes shareholders to seek projects that create short term capital but long term losses
Risk Management Irrelevance Proposition
Debt overhang
Traits of ERM
Exposure
26. Liquidity and maturity transformation - Brokers - Reduces transaction and information costs between households and corporations
Security (primary vs secondary)
Funding liquidity risk
Asset transformers
Basic Market risk
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
Credit event
Liquidity risk
Risks excluded from operational risk
Ways firms can fail to account for risks
28. Firms became multinational - - >watched xchange rates more - deregulation and globalization
Firms becoming more sensitive to changes(bank deregulation)
Tax shield
Basic Market risk
Asset transformers
29. Excess return equated to alpha plus expected systematic return E(Rp) - Rf = alpha + beta(E(Rm) - Rf)
Warning
: Invalid argument supplied for foreach() in
/var/www/html/basicversity.com/show_quiz.php
on line
183
30. Gamma = market price of the consumption beta - Beta = E(r) of zero consumption beta
Importance of communication for risk managers
Financial risks
Tracking error
Ri = Rz + (gamma)(beta)
31. (E(Rp) - MAR)/(sqrt((1/T)summation(Rpt- MAR)^2) - MAR - minimum acceptable return
Risk- adjusted performance measure (RAP)
Jensen's alpha
Sortino ratio
LTCM
32. Rp = XaRa + XbRb
Risk types addressed by ERM
Tracking error
Risks excluded from operational risk
Expected return of two assets
33. Asset-liability/market-liquidity risk
Settlement risk
Where is risk coming from
What lead to the exponential growth to derivatives mkt?
Liquidity risk
34. When two payments are exchanged the same day and one party may default after payment is made
Morningstar Rating System
VaR- based analysis (formula)
Settlement risk
Security (primary vs secondary)
35. Loss resulting from inadequate/failed internal processes - people or systems - back-office problems - settlement - etc - reconciliation
Operational risk
Risk Management Irrelevance Proposition
Tail VaR or TCE - Tail Conditional Expectation(TCE)
Contango
36. Wrong distribution - Historical sample may not apply
Basic Market risk
Effect of heterogeneous expectations on CAPM
Ways risk can be mismeasured
Settlement risk
37. Law of one price - Homogeneous expectations - Security returns process
Allied Irish Bank
BTR - Below Target Risk
APT (equation and assumptions)
Volatility Market risk
38. Inability to make payment obligations (ex. Margin calls)
Recovery rate
Roles of risk management
Funding liquidity risk
Contango
39. ex. Human capital - Equilibrium return can be higher or lower than it is under standard CAPM
CAPM with taxes included (equation)
Debt overhang
APT (equation and assumptions)
Nonmarketable asset impact on CAPM
40. Xmvp = ((variance of b) - covariance)/((variance of a) + (variance of b) - 2 * covariance)
Debt overhang
Four major types of risk
Effect of heterogeneous expectations on CAPM
Solve for minimum variance portfolio
41. Quantile of a statistical distribution
Basic Market risk
Efficient frontier
Traits of ERM
Parametric VaR
42. Focus on adverse tail of distribution - Relevant for determining economic capital (EC) requirements
Solvency-related metrics
Jensen's alpha
Operational risk
Ways firms can fail to account for risks
43. Concentrate on mid- region of probability distribution - Relevant to owners and proxies
BTR - Below Target Risk
Debt overhang
Nonparametric VaR
Performance- related metrics
44. Curve must be concave - Straight line connecting any two points must be under the curve
Ri = Rz + (gamma)(beta)
Capital market line (CML)
Settlement risk
Shape of portfolio possibilities curve
45. 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
LTCM
Market imperfections that can create value
Solve for minimum variance portfolio
Market risk
46. CAPM requires the strong form of the Efficient Market Hypothesis = private information
Risk Management Irrelevance Proposition
Three main reasons for financial disasters
CAPM assumption for EMH
Debt overhang
47. 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
Ri = ai + bi1l1 + bi2l2....+ei
Nonmarketable asset impact on CAPM
Asset transformers
Barings
48. Excess return divided by portfolio volatility (std dev) Sp = (E(Rp) - Rf)/(std dev of Rp) - Better for non- diversified portfolios
Sharpe measure
Business Risk
Risk Management Irrelevance Proposition
Efficient frontier
49. Quantile of an empirical distribution
Business Risk
Valuation vs. Risk management
Nonparametric VaR
Expected return of two assets
50. Relative portfolio risk (RRiskp) - Based on a one- month investment period
RAR = relative return of portfolio (RRp)
Ten assumptions underlying CAPM
Ways risk can be mismeasured
Business risks