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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. Asset-liability/market-liquidity risk






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






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






4. Quantile of a statistical distribution






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






6. 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






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






8. 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






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






10. Changes in vol - implied or actual






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






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






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






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






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






16. 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 -






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






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






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






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






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






22. Wrong distribution - Historical sample may not apply






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






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






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






26. Strategic risk - Business risk - Reputational risk






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






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






29. Volatility of unexpected outcomes






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






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






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






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






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






35. 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






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






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






38. 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






39. 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






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






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






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






43. Quantile of an empirical distribution






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






45. 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






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






47. Asses firm risks - Communicate risks - Manage and monitor risks






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






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






50. Potential amount that can be lost