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






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






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






4. Difference between forward price and spot price - Should approach zero as the contract approaches maturity






5. Interest rate movements - derivatives - defaults






6. Rp = XaRa + XbRb






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






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






9. 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






10. 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






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






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






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






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






15. Market risk - Liquidity risk - Credit risk - Operational risk






16. Concentrate on mid- region of probability distribution - Relevant to owners and proxies






17. Risk- adjusted rating (RAR) - Difference between relative returns and relative risk






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






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






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






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






22. Strategic risk - Business risk - Reputational risk






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






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






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






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






27. Changes in vol - implied or actual






28. Misleading reporting (incorrect market info) - Due to large market moves - Due to conduct of customer business






29. 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 -






30. Both probability and cost of tail events are considered






31. Return is linearly related to growth rate in consumption






32. 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






33. 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.






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






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






36. Hazard - Financial - Operational - Strategic






37. 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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38. Potential amount that can be lost






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






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






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






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






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






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






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






46. 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






47. Asset-liability/market-liquidity risk






48. 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






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






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