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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. 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






2. Make common factor beta - Build optimal portfolios - Judge valuation of securities - Track an index but enhance with stock selection






3. Economic Cost of Ruin(ECOR) - Enhancement to probability of ruin where severity of ruin is reflected






4. Capital structure (financial distress) - Taxes - Agency and information asymmetries






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






7. 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






8. Hazard - Financial - Operational - Strategic






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






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






11. Wrong distribution - Historical sample may not apply






12. Return is linearly related to growth rate in consumption






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






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






15. 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






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






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






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






19. Focus on adverse tail of distribution - Relevant for determining economic capital (EC) requirements






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






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






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






23. 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






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






25. When two payments are exchanged the same day and one party may default after payment is made






26. Too much debt - Causes shareholders to seek projects that create short term capital but long term losses






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






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






29. Excess return divided by portfolio volatility (std dev) Sp = (E(Rp) - Rf)/(std dev of Rp) - Better for non- diversified portfolios






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






31. 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






32. 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 -






33. Both probability and cost of tail events are considered






34. Interest rate movements - derivatives - defaults






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






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






37. Strategic risk - Business risk - Reputational risk






38. Volatility of unexpected outcomes






39. Covariance = correlation coefficient std dev(a) std dev(b)






40. Security is a financial claim issued to raise capital - Primary securities are backed by real assets - Secondary securities are backed by primary securities






41. Excess return equated to alpha plus expected systematic return E(Rp) - Rf = alpha + beta(E(Rm) - Rf)

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42. Relative portfolio risk (RRiskp) - Based on a one- month investment period






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






44. Potential amount that can be lost






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






46. Summarizes the worst loss over a period that will not be exceeded by a given level of confidence - Always one tailed






47. Derives value from an underlying asset - rate - or index - Derives value from a security






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






49. Multibeta CAPM Ri - Rf =






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