Test your basic knowledge |

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






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






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






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






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






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






7. Changes in vol - implied or actual






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






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






10. 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






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






12. No transaction costs - assets infinitely divisible - no personal tax - perfect competition - investors only care about mean and variance - short- selling allowed - unlimited lending and borrowing - homogeneity: single period - homogeneity: same mean






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






14. 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






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






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






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






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






19. 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.






20. 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


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






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






23. Volatility of unexpected outcomes






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






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






26. Asset-liability/market-liquidity risk






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






28. Std dev between portfolio return and benchmark return TE = std dev * (Rp- Rb) - Benchmark funds






29. Rp = XaRa + XbRb






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






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






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






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






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






35. Future price is greater than the spot price






36. Liquidity and maturity transformation - Brokers - Reduces transaction and information costs between households and corporations






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






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






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






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






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






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






43. Country specific - Foreign exchange controls that prohibit counterparty's obligations






44. 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






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






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






47. Quantile of an empirical distribution






48. Curve must be concave - Straight line connecting any two points must be under the curve






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






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