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. Valuation focuses on mean of distribution vs risk mgmt focuses on potential variation in payoffs - needs more precision for pricing - VAR doesn't b/c noise cancels out






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






3. Interest rate movements - derivatives - defaults






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






5. Strategic risk - Business risk - Reputational risk






6. Efficient frontier with inclusion of risk free rate - Straight line with formula Rc = Rf + ((Ra - Rf)/std dev(a))*std dev(c) - c is the total portfolio - a is the risky asset






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






8. Quantile of an empirical distribution






9. Market risk - Liquidity risk - Credit risk - Operational risk






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






11. 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






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






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






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






15. Quantile of a statistical distribution






16. 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






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






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






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






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






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






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






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






24. Future price is greater than the spot price






25. 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






26. 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






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






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






29. 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

Warning: Invalid argument supplied for foreach() in /var/www/html/basicversity.com/show_quiz.php on line 183


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






31. 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






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






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






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






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






36. May not scale over time- Historical data may be meaningless - Not designed to account for catastrophes - VaR says nothing about losses in excess of VaR - May not handle sudden illiquidity






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






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






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






40. Hazard - Financial - Operational - Strategic






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






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






43. Return is linearly related to growth rate in consumption






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






45. Rp = XaRa + XbRb






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






47. Unanticipated movements in relative prices of assets in hedged position






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






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






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