SUBJECTS
|
BROWSE
|
CAREER CENTER
|
POPULAR
|
JOIN
|
LOGIN
Business Skills
|
Soft Skills
|
Basic Literacy
|
Certifications
About
|
Help
|
Privacy
|
Terms
|
Email
Search
Test your basic knowledge |
FRM: Foundations Of Risk Management
Start Test
Study First
Subjects
:
business-skills
,
certifications
,
frm
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. Volatility of unexpected outcomes
Contango
Credit event
Risk
Three main reasons for financial disasters
2. Probability distribution is unknown (ex. A terrorist attack)
Firms becoming more sensitive to changes(bank deregulation)
Uncertainty
Traits of ERM
Risk
3. Economic Cost of Ruin(ECOR) - Enhancement to probability of ruin where severity of ruin is reflected
Ri = ai + bi1l1 + bi2l2....+ei
EPD or ECOR - Expected Policyholder Deficit (EPD)
RAR = relative return of portfolio (RRp)
Correlation coefficient effect on diversification
4. Volatility of expected outcomes - Outcomes are random but distribution is known or approximated
Risk
Business Risk
Forms of Market risk
CAPM assumption for EMH
5. The lower (closer to - 1) - the higher the payoff from diversification
Multi- period version of CAPM
Correlation coefficient effect on diversification
Models used in ERM framework
Nonmarketable asset impact on CAPM
6. Probability that a random variable falls below a specified threshold level
Roles of risk management
Shortfall risk
Capital market line (CML)
Ways risk can be mismeasured
7. 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
Practical considerations related to ERM implementatio
Settlement risk
Credit event
Correlation coefficient effect on diversification
8. Gamma = market price of the consumption beta - Beta = E(r) of zero consumption beta
Tail VaR or TCE - Tail Conditional Expectation(TCE)
Performance- related metrics
Ri = Rz + (gamma)(beta)
Market risk
9. People risk = fraud - etc. - Model risk = flawed valuation models - Legal risk = exposure to fines and lawsuits
Funding liquidity risk
Credit event
3 main types of operational risk
Shortfall risk
10. E(Ri) = Rf + beta[(E(Rm)- Rf)- (tax factor)(dividend yield for market - Rf)] + (tax factor)(dividend yield for stock - Rf)
CAPM with taxes included (equation)
Risks excluded from operational risk
Kidder Peabody
VaR- based analysis (formula)
11. Covariance = correlation coefficient std dev(a) std dev(b)
APT for passive portfolio management
Formula for covariance
Three main reasons for financial disasters
Exposure
12. Unanticipated movements in relative prices of assets in hedged position
Nonmarketable asset impact on CAPM
Basic Market risk
Efficient frontier
Risk
13. Absolute and relative risk - direction and non-directional
Ways firms can fail to account for risks
Ten assumptions underlying CAPM
Forms of Market risk
Traits of ERM
14. When firm has so much debt that it leads to making investment decisions that benefit shareholdser but affect total firm value adversely
APT (equation and assumptions)
Asset transformers
Debt overhang
Tracking error
15. 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
Recovery rate
Allied Irish Bank
Uncertainty
Barings
16. Strategic risk - Business risk - Reputational risk
Risks excluded from operational risk
Ways risk can be mismeasured
EPD or ECOR - Expected Policyholder Deficit (EPD)
Valuation vs. Risk management
17. Quantile of a statistical distribution
Parametric VaR
Risk types addressed by ERM
Ri = Rz + (gamma)(beta)
LTCM
18. Excess return divided by portfolio volatility (std dev) Sp = (E(Rp) - Rf)/(std dev of Rp) - Better for non- diversified portfolios
Ways firms can fail to account for risks
Sharpe measure
Effect of non- price- taking behavior on CAPM
Solve for minimum variance portfolio
19. 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
Drysdale Securities (Chase Manhattan)
Firms becoming more sensitive to changes(bank deregulation)
Risk Management Irrelevance Proposition
Shortfall risk
20. Rp = XaRa + XbRb
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
Asset liquidity risk
Allied Irish Bank
Expected return of two assets
21. Liquidity and maturity transformation - Brokers - Reduces transaction and information costs between households and corporations
Shape of portfolio possibilities curve
Asset transformers
Sortino ratio
Ten assumptions underlying CAPM
22. Wrong distribution - Historical sample may not apply
Shortfall risk
Risk
Probability of ruin
Ways risk can be mismeasured
23. CAPM requires the strong form of the Efficient Market Hypothesis = private information
Sovereign risk
Market imperfections that can create value
CAPM assumption for EMH
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
24. IR = (E(Rp) - E(Rb))/(std dev(Rp- Rb)) - Evaluate manager of a benchmark fund
Capital market line (CML)
Risk
Kidder Peabody
Information ratio
25. 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
Exposure
Tax shield
Ten assumptions underlying CAPM
Risk types addressed by ERM
26. Changes in vol - implied or actual
Market risk
Uncertainty
Volatility Market risk
Roles of risk management
27. Relationship drawn from CML - RAP = [(market std dev)/(portfolio std dev)]*(Portfolio return - risk free rate) + risk free rate - annualized
Risk- adjusted performance measure (RAP)
Solvency-related metrics
Options motivation on volatility
Ten assumptions underlying CAPM
28. The need to hedge against risks - for firms need to speculate.
Basic Market risk
Asset liquidity risk
What lead to the exponential growth to derivatives mkt?
APT for passive portfolio management
29. 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
Probability of ruin
Correlation coefficient effect on diversification
Ways firms can fail to account for risks
Prices of risk vs sensitivity
30. Concave function that extends from minimum variance portfolio to maximum return portfolio
Efficient frontier
APT in active portfolio management
Risks excluded from operational risk
Banker's Trust
31. Multibeta CAPM Ri - Rf =
Capital market line (CML)
Ten assumptions underlying CAPM
Financial Risk
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
32. The uses of debt to fall into a lower tax rate
Tax shield
Barings
Valuation vs. Risk management
Tracking error
33. Future price is greater than the spot price
Contango
Where is risk coming from
Parametric VaR
APT for passive portfolio management
34. When negative taxable income is moved to a different year to offset future or past taxable income
Carry- backs and carry- forwards
Tracking error
Nonmarketable asset impact on CAPM
Ways firms can fail to account for risks
35. Sqrt((Xa^2)(variance of a) + (1- Xa)^2(variance of b) + 2(Xa)(1- Xa)(covariance))
EPD or ECOR - Expected Policyholder Deficit (EPD)
Standard deviation of two assets
Financial risks
Tax shield
36. Excess return divided by portfolio beta Tp = (E(Rp) - Rf)/portfolio beta - Better for well diversified portfolios
Liquidity risk
Solvency-related metrics
Treynor measure
Market risk
37. Misleading reporting (incorrect market info) - Due to large market moves - Due to conduct of customer business
Three main reasons for financial disasters
Recovery rate
Valuation vs. Risk management
Basis risk
38. Simple form of CAPM - but market price of risk is lower than if all investors were price takers
CAPM assumption for EMH
Effect of non- price- taking behavior on CAPM
Derivative contract
Importance of communication for risk managers
39. Market risk - Liquidity risk - Credit risk - Operational risk
Options motivation on volatility
Valuation vs. Risk management
APT in active portfolio management
Four major types of risk
40. 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 -
Nonparametric VaR
Three main reasons for financial disasters
Source of need for risk management
Treynor measure
41. Return is linearly related to growth rate in consumption
Importance of communication for risk managers
Settlement risk
Multi- period version of CAPM
Sharpe measure
42. Summarizes the worst loss over a period that will not be exceeded by a given level of confidence - Always one tailed
Differences in financial risk management for financial companies vs industrial companies
Market imperfections that can create value
VaR - Value at Risk
Multi- period version of CAPM
43. Equilibrium can still be expressed in returns - covariance - and variance - but they become complex weighted averages
Ways firms can fail to account for risks
RAR = relative return of portfolio (RRp)
Effect of heterogeneous expectations on CAPM
Prices of risk vs sensitivity
44. Both probability and cost of tail events are considered
Security (primary vs secondary)
Treynor measure
Tail VaR or TCE - Tail Conditional Expectation(TCE)
Funding liquidity risk
45. Curve must be concave - Straight line connecting any two points must be under the curve
Shape of portfolio possibilities curve
Barings
Valuation vs. Risk management
Uncertainty
46. Risk- adjusted rating (RAR) - Difference between relative returns and relative risk
Morningstar Rating System
LTCM
Risk types addressed by ERM
Firms becoming more sensitive to changes(bank deregulation)
47. Risk replaced with VaR (Portfolio return - risk free rate)/(portfolio VaR/initial value of portfolio)
VaR- based analysis (formula)
Source of need for risk management
Morningstar Rating System
CAPM with taxes included (equation)
48. Law of one price - Homogeneous expectations - Security returns process
Capital market line (CML)
Kidder Peabody
VaR- based analysis (formula)
APT (equation and assumptions)
49. Asses firm risks - Communicate risks - Manage and monitor risks
Roles of risk management
Practical considerations related to ERM implementatio
Debt overhang
Shortcomings of risk metrics
50. Capital Asset Pricing Model Ri = Rf + beta*(Rm - Rf)
CAPM (formula)
CAPM assumption for EMH
Tax shield
Asset liquidity risk