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






2. 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






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






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






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






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






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






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






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






11. 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






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






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






14. Volatility of unexpected outcomes






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






16. Multibeta CAPM Ri - Rf =






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






18. Wrong distribution - Historical sample may not apply






19. Interest rate movements - derivatives - defaults






20. Market risk - Liquidity risk - Credit risk - Operational risk






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






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






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






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






25. The lower (closer to - 1) - the higher the payoff from diversification






26. Potential amount that can be lost






27. Hazard - Financial - Operational - Strategic






28. Risk replaced with VaR (Portfolio return - risk free rate)/(portfolio VaR/initial value of portfolio)






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






30. 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






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






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






33. 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






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






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






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






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






38. Volatility of expected outcomes - Outcomes are random but distribution is known or approximated






39. Asset-liability/market-liquidity risk






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






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






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






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






44. 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






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






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






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






48. 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






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






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