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. Misleading reporting (incorrect market info) - Due to large market moves - Due to conduct of customer business
Allied Irish Bank
Three main reasons for financial disasters
Settlement risk
Zero- beta CAPM (two factor model)
2. Need to assess risk and tell management so they can determine which risks to take on
Firms becoming more sensitive to changes(bank deregulation)
Liquidity risk
Models used in ERM framework
Importance of communication for risk managers
3. Market risk - Liquidity risk - Credit risk - Operational risk
Differences in financial risk management for financial companies vs industrial companies
Effect of non- price- taking behavior on CAPM
Uncertainty
Four major types of risk
4. Rp = XaRa + XbRb
Drysdale Securities (Chase Manhattan)
Settlement risk
Expected return of two assets
Formula for covariance
5. Occurs the day when two parties exchange payments same day
Zero- beta CAPM (two factor model)
Settlement risk
Uncertainty
Shortcomings of risk metrics
6. Make common factor beta - Build optimal portfolios - Judge valuation of securities - Track an index but enhance with stock selection
APT in active portfolio management
Exposure
BTR - Below Target Risk
Correlation coefficient effect on diversification
7. When firm has so much debt that it leads to making investment decisions that benefit shareholdser but affect total firm value adversely
Asset liquidity risk
Tail VaR or TCE - Tail Conditional Expectation(TCE)
APT in active portfolio management
Debt overhang
8. Future price is greater than the spot price
APT (equation and assumptions)
Basis
Capital market line (CML)
Contango
9. 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
Parametric VaR
Differences in financial risk management for financial companies vs industrial companies
Three main reasons for financial disasters
Practical considerations related to ERM implementatio
10. Changes in vol - implied or actual
Carry- backs and carry- forwards
Ways risk can be mismeasured
Financial risks
Volatility Market risk
11. Expected value of unfavorable deviations of a random variable from a specified target level
BTR - Below Target Risk
Volatility Market risk
Effect of non- price- taking behavior on CAPM
Standard deviation of two assets
12. Derives value from an underlying asset - rate - or index - Derives value from a security
Financial risks
Credit event
Derivative contract
Drysdale Securities (Chase Manhattan)
13. Both probability and cost of tail events are considered
Security (primary vs secondary)
Tail VaR or TCE - Tail Conditional Expectation(TCE)
Settlement risk
Forms of Market risk
14. Returns on any stock are linearly related to a set of indexes
Credit event
Ri = ai + bi1l1 + bi2l2....+ei
Carry- backs and carry- forwards
Market risk
15. People risk = fraud - etc. - Model risk = flawed valuation models - Legal risk = exposure to fines and lawsuits
Prices of risk vs sensitivity
Differences in financial risk management for financial companies vs industrial companies
Asset liquidity risk
3 main types of operational risk
16. When two payments are exchanged the same day and one party may default after payment is made
CAPM assumption for EMH
Options motivation on volatility
Settlement risk
3 main types of operational risk
17. Probability that a random variable falls below a specified threshold level
Shortfall risk
Firms becoming more sensitive to changes(bank deregulation)
Traits of ERM
Effect of non- price- taking behavior on CAPM
18. Risk of loses owing to movements in level or volatility of market prices
Ways firms can fail to account for risks
Market risk
Risk types addressed by ERM
Efficient frontier
19. Capital Asset Pricing Model Ri = Rf + beta*(Rm - Rf)
Asset transformers
Market risk
Information ratio
CAPM (formula)
20. Unanticipated movements in relative prices of assets in hedged position
Basic Market risk
Ways risk can be mismeasured
Uncertainty
Jensen's alpha
21. Gamma = market price of the consumption beta - Beta = E(r) of zero consumption beta
Zero- beta CAPM (two factor model)
Settlement risk
Ri = Rz + (gamma)(beta)
Models used in ERM framework
22. Volatility of unexpected outcomes
Risk
Risk types addressed by ERM
Performance- related metrics
Standard deviation of two assets
23. 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
Shape of portfolio possibilities curve
Capital market line (CML)
Sovereign risk
LTCM
24. Unanticipated movements in relative prices of assets in a hedged position - All hedges imply some basis risk
Settlement risk
Derivative contract
Basis risk
Kidder Peabody
25. 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
Barings
Traits of ERM
Allied Irish Bank
Tracking error
26. Risk- adjusted rating (RAR) - Difference between relative returns and relative risk
Sharpe measure
Ways risk can be mismeasured
Formula for covariance
Morningstar Rating System
27. Multibeta CAPM Ri - Rf =
Asset liquidity risk
Prices of risk vs sensitivity
EPD or ECOR - Expected Policyholder Deficit (EPD)
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
28. Risks that are assumed willingly - to gain a competitive edge or add shareholder value
Settlement risk
Traits of ERM
Firms becoming more sensitive to changes(bank deregulation)
Business risks
29. Asses firm risks - Communicate risks - Manage and monitor risks
Effect of heterogeneous expectations on CAPM
Forms of Market risk
Roles of risk management
Liquidity risk
30. Ri = Rz + (Rm - Rz)*beta - Rz = return on zero- beta portfolio
Zero- beta CAPM (two factor model)
Models used in ERM framework
APT (equation and assumptions)
Nonparametric VaR
31. Strategic risk - Business risk - Reputational risk
Shortfall risk
CAPM assumption for EMH
Risks excluded from operational risk
APT in active portfolio management
32. When negative taxable income is moved to a different year to offset future or past taxable income
Recovery rate
Barings
Carry- backs and carry- forwards
Shortcomings of risk metrics
33. 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
EPD or ECOR - Expected Policyholder Deficit (EPD)
Shortcomings of risk metrics
Drysdale Securities (Chase Manhattan)
Zero- beta CAPM (two factor model)
34. Economic Cost of Ruin(ECOR) - Enhancement to probability of ruin where severity of ruin is reflected
CAPM assumption for EMH
EPD or ECOR - Expected Policyholder Deficit (EPD)
Recovery rate
Risk types addressed by ERM
35. 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
Solvency-related metrics
Settlement risk
Kidder Peabody
Tax shield
36. Focus on adverse tail of distribution - Relevant for determining economic capital (EC) requirements
Sortino ratio
Uncertainty
Shortfall risk
Solvency-related metrics
37. Potential amount that can be lost
Firms becoming more sensitive to changes(bank deregulation)
Practical considerations related to ERM implementatio
Liquidity risk
Exposure
38. Return is linearly related to growth rate in consumption
Multi- period version of CAPM
Valuation vs. Risk management
Market imperfections that can create value
Settlement risk
39. Proportion of loss that is recovered - Also referred to as "cents on the dollar"
Credit event
Recovery rate
Business risks
Carry- backs and carry- forwards
40. Quantile of an empirical distribution
Risk
Nonparametric VaR
Three main reasons for financial disasters
VaR- based analysis (formula)
41. Too much debt - Causes shareholders to seek projects that create short term capital but long term losses
CAPM (formula)
Barings
APT in active portfolio management
Debt overhang
42. Volatility of expected outcomes - Outcomes are random but distribution is known or approximated
Risk Management Irrelevance Proposition
Where is risk coming from
Tracking error
Risk
43. Credit risk that occurs when there is a change in the counterparty's ability to perform its obligations
Credit event
Liquidity risk
Options motivation on volatility
Drysdale Securities (Chase Manhattan)
44. Excess return divided by portfolio volatility (std dev) Sp = (E(Rp) - Rf)/(std dev of Rp) - Better for non- diversified portfolios
Nonmarketable asset impact on CAPM
Tracking error
Sharpe measure
Capital market line (CML)
45. 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
Asset transformers
Security (primary vs secondary)
Business Risk
Operational risk
46. Hazard - Financial - Operational - Strategic
EPD or ECOR - Expected Policyholder Deficit (EPD)
APT for passive portfolio management
Allied Irish Bank
Risk types addressed by ERM
47. Excess return equated to alpha plus expected systematic return E(Rp) - Rf = alpha + beta(E(Rm) - Rf)
48. Equilibrium can still be expressed in returns - covariance - and variance - but they become complex weighted averages
Effect of heterogeneous expectations on CAPM
Recovery rate
Tail VaR or TCE - Tail Conditional Expectation(TCE)
Importance of communication for risk managers
49. Modeling approach is typically between statistical analytic models and structural simulation models
Credit event
Nonparametric VaR
Effect of heterogeneous expectations on CAPM
Models used in ERM framework
50. Concave function that extends from minimum variance portfolio to maximum return portfolio
Efficient frontier
Banker's Trust
Expected return of two assets
Uncertainty