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






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






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






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






5. Cannot exit position in market due to size of the position






6. Quantile of an empirical distribution






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






8. Wrong distribution - Historical sample may not apply






9. Multibeta CAPM Ri - Rf =






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






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






12. Quantile of a statistical distribution






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






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






15. Losses due to market activities ex. Interest rate changes or defaults






16. 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






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






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






19. 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






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






21. 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






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






23. Need to assess risk and tell management so they can determine which risks to take on






24. Absolute and relative risk - direction and non-directional






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






26. 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






27. Changes in vol - implied or actual






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






29. 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






30. Loss resulting from inadequate/failed internal processes - people or systems - back-office problems - settlement - etc - reconciliation






31. 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






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






33. 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






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






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






36. Human - created: business cycles - inflation - govt policy changes - wars - Natural: weather - quakes






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






38. Strategic risk - Business risk - Reputational risk






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






40. Potential amount that can be lost






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






42. Future price is greater than the spot price






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






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






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






46. When negative taxable income is moved to a different year to offset future or past taxable income






47. Interest rate movements - derivatives - defaults






48. Market risk - Liquidity risk - Credit risk - Operational risk






49. Asset-liability/market-liquidity risk






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