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. Absolute and relative risk - direction and non-directional
Forms of Market risk
CAPM (formula)
Basic Market risk
Probability of ruin
2. Return is linearly related to growth rate in consumption
Funding liquidity risk
Multi- period version of CAPM
Basis risk
Where is risk coming from
3. Equilibrium can still be expressed in returns - covariance - and variance - but they become complex weighted averages
Debt overhang
Efficient frontier
Effect of heterogeneous expectations on CAPM
Four major types of risk
4. Derives value from an underlying asset - rate - or index - Derives value from a security
Shape of portfolio possibilities curve
Debt overhang
Funding liquidity risk
Derivative contract
5. 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
Uncertainty
Financial risks
Three main reasons for financial disasters
Traits of ERM
6. 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
7. Make common factor beta - Build optimal portfolios - Judge valuation of securities - Track an index but enhance with stock selection
APT in active portfolio management
Jensen's alpha
Sortino ratio
Firms becoming more sensitive to changes(bank deregulation)
8. Capital structure (financial distress) - Taxes - Agency and information asymmetries
Market imperfections that can create value
Risk
Ways risk can be mismeasured
Funding liquidity risk
9. When two payments are exchanged the same day and one party may default after payment is made
Settlement risk
LTCM
Derivative contract
CAPM assumption for EMH
10. 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 -
Ten assumptions underlying CAPM
BTR - Below Target Risk
Source of need for risk management
Performance- related metrics
11. Rp = XaRa + XbRb
Expected return of two assets
Capital market line (CML)
Sortino ratio
What lead to the exponential growth to derivatives mkt?
12. Probability distribution is unknown (ex. A terrorist attack)
Ten assumptions underlying CAPM
Risk
LTCM
Uncertainty
13. Difference between forward price and spot price - Should approach zero as the contract approaches maturity
Basis
Basic Market risk
Probability of ruin
Source of need for risk management
14. Returns on any stock are linearly related to a set of indexes
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
Morningstar Rating System
Models used in ERM framework
Ri = ai + bi1l1 + bi2l2....+ei
15. 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
Practical considerations related to ERM implementatio
Tail VaR or TCE - Tail Conditional Expectation(TCE)
Kidder Peabody
Liquidity risk
16. Both probability and cost of tail events are considered
Multi- period version of CAPM
Tail VaR or TCE - Tail Conditional Expectation(TCE)
Zero- beta CAPM (two factor model)
APT in active portfolio management
17. Liquidity and maturity transformation - Brokers - Reduces transaction and information costs between households and corporations
APT (equation and assumptions)
Practical considerations related to ERM implementatio
Asset transformers
Barings
18. Credit risk that occurs when there is a change in the counterparty's ability to perform its obligations
Ten assumptions underlying CAPM
Security (primary vs secondary)
Credit event
Kidder Peabody
19. CAPM requires the strong form of the Efficient Market Hypothesis = private information
CAPM assumption for EMH
Derivative contract
Multi- period version of CAPM
APT for passive portfolio management
20. Proportion of loss that is recovered - Also referred to as "cents on the dollar"
Ten assumptions underlying CAPM
Recovery rate
Multi- period version of CAPM
Morningstar Rating System
21. 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
Barings
Capital market line (CML)
BTR - Below Target Risk
Basis
22. Strategic risk - Business risk - Reputational risk
Banker's Trust
Business risks
CAPM with taxes included (equation)
Risks excluded from operational risk
23. 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
APT for passive portfolio management
Settlement risk
Forms of Market risk
Roles of risk management
24. 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 assumption for EMH
Models used in ERM framework
Importance of communication for risk managers
25. When firm has so much debt that it leads to making investment decisions that benefit shareholdser but affect total firm value adversely
Debt overhang
Traits of ERM
Risks excluded from operational risk
Financial Risk
26. Too much debt - Causes shareholders to seek projects that create short term capital but long term losses
Debt overhang
Where is risk coming from
Financial Risk
APT (equation and assumptions)
27. 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
Standard deviation of two assets
Carry- backs and carry- forwards
Roles of risk management
Drysdale Securities (Chase Manhattan)
28. Capital Asset Pricing Model Ri = Rf + beta*(Rm - Rf)
Solvency-related metrics
CAPM (formula)
Roles of risk management
Ten assumptions underlying CAPM
29. Interest rate movements - derivatives - defaults
Prices of risk vs sensitivity
Financial Risk
Business risks
Shape of portfolio possibilities curve
30. Modeling approach is typically between statistical analytic models and structural simulation models
Performance- related metrics
Efficient frontier
Tracking error
Models used in ERM framework
31. Risks that are assumed willingly - to gain a competitive edge or add shareholder value
Ten assumptions underlying CAPM
Business risks
Asset liquidity risk
VaR- based analysis (formula)
32. (E(Rp) - MAR)/(sqrt((1/T)summation(Rpt- MAR)^2) - MAR - minimum acceptable return
Treynor measure
Standard deviation of two assets
Sortino ratio
EPD or ECOR - Expected Policyholder Deficit (EPD)
33. Wrong distribution - Historical sample may not apply
Ways risk can be mismeasured
Treynor measure
Solve for minimum variance portfolio
Barings
34. Gamma = market price of the consumption beta - Beta = E(r) of zero consumption beta
VaR- based analysis (formula)
Ri = Rz + (gamma)(beta)
Differences in financial risk management for financial companies vs industrial companies
Kidder Peabody
35. ex. Human capital - Equilibrium return can be higher or lower than it is under standard CAPM
Morningstar Rating System
Market imperfections that can create value
Nonmarketable asset impact on CAPM
Efficient frontier
36. Hazard - Financial - Operational - Strategic
Risk types addressed by ERM
CAPM assumption for EMH
Shape of portfolio possibilities curve
Ways firms can fail to account for risks
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
Warning
: Invalid argument supplied for foreach() in
/var/www/html/basicversity.com/show_quiz.php
on line
183
38. Ri = Rz + (Rm - Rz)*beta - Rz = return on zero- beta portfolio
Forms of Market risk
Zero- beta CAPM (two factor model)
Solve for minimum variance portfolio
Market risk
39. Quantile of an empirical distribution
Nonparametric VaR
Basis risk
Solve for minimum variance portfolio
Morningstar Rating System
40. Unanticipated movements in relative prices of assets in a hedged position - All hedges imply some basis risk
3 main types of operational risk
Importance of communication for risk managers
Basis risk
Financial Risk
41. Long in options = expecting volatility increase - Short in options = expecting volatility decrease
Sovereign risk
Zero- beta CAPM (two factor model)
APT for passive portfolio management
Options motivation on volatility
42. Sqrt((Xa^2)(variance of a) + (1- Xa)^2(variance of b) + 2(Xa)(1- Xa)(covariance))
Basis risk
Zero- beta CAPM (two factor model)
Performance- related metrics
Standard deviation of two assets
43. 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
Ri = Rz + (gamma)(beta)
Funding liquidity risk
Asset liquidity risk
Business Risk
44. Losses due to market activities ex. Interest rate changes or defaults
Financial risks
Information ratio
Tax shield
Ri = ai + bi1l1 + bi2l2....+ei
45. 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
Traits of ERM
Allied Irish Bank
Financial risks
What lead to the exponential growth to derivatives mkt?
46. 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
Carry- backs and carry- forwards
Valuation vs. Risk management
Sharpe measure
LTCM
47. Concentrate on mid- region of probability distribution - Relevant to owners and proxies
Zero- beta CAPM (two factor model)
Performance- related metrics
Shape of portfolio possibilities curve
Tail VaR or TCE - Tail Conditional Expectation(TCE)
48. Risk of loses owing to movements in level or volatility of market prices
Security (primary vs secondary)
Ways firms can fail to account for risks
Shape of portfolio possibilities curve
Market risk
49. Country specific - Foreign exchange controls that prohibit counterparty's obligations
EPD or ECOR - Expected Policyholder Deficit (EPD)
Financial risks
Expected return of two assets
Sovereign risk
50. Law of one price - Homogeneous expectations - Security returns process
RAR = relative return of portfolio (RRp)
APT (equation and assumptions)
Settlement risk
Source of need for risk management