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. Capital Asset Pricing Model Ri = Rf + beta*(Rm - Rf)
Effect of heterogeneous expectations on CAPM
Debt overhang
CAPM (formula)
Risk
2. Multibeta CAPM Ri - Rf =
LTCM
APT in active portfolio management
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
Credit event
3. Curve must be concave - Straight line connecting any two points must be under the curve
Shape of portfolio possibilities curve
Valuation vs. Risk management
Options motivation on volatility
Settlement risk
4. Difference between forward price and spot price - Should approach zero as the contract approaches maturity
APT in active portfolio management
EPD or ECOR - Expected Policyholder Deficit (EPD)
Basis
RAR = relative return of portfolio (RRp)
5. Absolute and relative risk - direction and non-directional
3 main types of operational risk
APT for passive portfolio management
Forms of Market risk
Basis 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
Capital market line (CML)
Risks excluded from operational risk
Shape of portfolio possibilities curve
Contango
7. Proportion of loss that is recovered - Also referred to as "cents on the dollar"
Recovery rate
Standard deviation of two assets
Forms of Market risk
Efficient frontier
8. The lower (closer to - 1) - the higher the payoff from diversification
Importance of communication for risk managers
Banker's Trust
Correlation coefficient effect on diversification
Where is risk coming from
9. 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 -
Basic Market risk
Jensen's alpha
Forms of Market risk
Source of need for risk management
10. Risk replaced with VaR (Portfolio return - risk free rate)/(portfolio VaR/initial value of portfolio)
Expected return of two assets
Volatility Market risk
Tax shield
VaR- based analysis (formula)
11. Risk of loses owing to movements in level or volatility of market prices
Traits of ERM
Market risk
Sovereign risk
LTCM
12. Hazard - Financial - Operational - Strategic
Risk types addressed by ERM
Funding liquidity risk
Solvency-related metrics
Tail VaR or TCE - Tail Conditional Expectation(TCE)
13. Std dev between portfolio return and benchmark return TE = std dev * (Rp- Rb) - Benchmark funds
Exposure
Expected return of two assets
Tracking error
Risk Management Irrelevance Proposition
14. Covariance = correlation coefficient std dev(a) std dev(b)
Efficient frontier
Formula for covariance
Risks excluded from operational risk
Exposure
15. CAPM requires the strong form of the Efficient Market Hypothesis = private information
CAPM assumption for EMH
Volatility Market risk
Financial Risk
Shape of portfolio possibilities curve
16. Probability distribution is unknown (ex. A terrorist attack)
Basis risk
3 main types of operational risk
Uncertainty
Correlation coefficient effect on diversification
17. Occurs the day when two parties exchange payments same day
Exposure
3 main types of operational risk
Settlement risk
Operational risk
18. Long in options = expecting volatility increase - Short in options = expecting volatility decrease
Business Risk
Options motivation on volatility
Allied Irish Bank
Information ratio
19. Quantile of a statistical distribution
APT for passive portfolio management
Risk
Shortfall risk
Parametric VaR
20. Inability to make payment obligations (ex. Margin calls)
Correlation coefficient effect on diversification
Financial risks
Derivative contract
Funding liquidity risk
21. Modeling approach is typically between statistical analytic models and structural simulation models
Models used in ERM framework
Source of need for risk management
Nonmarketable asset impact on CAPM
Carry- backs and carry- forwards
22. Concave function that extends from minimum variance portfolio to maximum return portfolio
Shape of portfolio possibilities curve
Efficient frontier
Funding liquidity risk
APT for passive portfolio management
23. Security is a financial claim issued to raise capital - Primary securities are backed by real assets - Secondary securities are backed by primary securities
Shape of portfolio possibilities curve
Performance- related metrics
Market imperfections that can create value
Security (primary vs secondary)
24. Unanticipated movements in relative prices of assets in a hedged position - All hedges imply some basis risk
Uncertainty
What lead to the exponential growth to derivatives mkt?
Basis risk
Sharpe measure
25. Derives value from an underlying asset - rate - or index - Derives value from a security
Basis risk
Tracking error
Four major types of risk
Derivative contract
26. The uses of debt to fall into a lower tax rate
Information ratio
Tax shield
Operational risk
Effect of heterogeneous expectations on CAPM
27. When two payments are exchanged the same day and one party may default after payment is made
Ri = ai + bi1l1 + bi2l2....+ei
EPD or ECOR - Expected Policyholder Deficit (EPD)
Settlement risk
Treynor measure
28. Interest rate movements - derivatives - defaults
Nonmarketable asset impact on CAPM
Financial Risk
Jensen's alpha
Derivative contract
29. Loss resulting from inadequate/failed internal processes - people or systems - back-office problems - settlement - etc - reconciliation
Kidder Peabody
Operational risk
Efficient frontier
Prices of risk vs sensitivity
30. Managing risks is a core activity at financial companies - Industrial companies hedge financial risks
Tracking error
Morningstar Rating System
Kidder Peabody
Differences in financial risk management for financial companies vs industrial companies
31. People risk = fraud - etc. - Model risk = flawed valuation models - Legal risk = exposure to fines and lawsuits
Nonmarketable asset impact on CAPM
RAR = relative return of portfolio (RRp)
3 main types of operational risk
Zero- beta CAPM (two factor model)
32. 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
Kidder Peabody
CAPM (formula)
Sortino ratio
Risk
33. Need to assess risk and tell management so they can determine which risks to take on
3 main types of operational risk
Importance of communication for risk managers
Business risks
Probability of ruin
34. Country specific - Foreign exchange controls that prohibit counterparty's obligations
Tax shield
LTCM
Sovereign risk
CAPM with taxes included (equation)
35. Cannot exit position in market due to size of the position
Financial risks
Practical considerations related to ERM implementatio
Formula for covariance
Asset liquidity risk
36. Firm may ignore known risk - Somebody in firm may know about risk - but it's not captured by models - Realization of a truly unknown risk
Kidder Peabody
Ri = ai + bi1l1 + bi2l2....+ei
Ways firms can fail to account for risks
Tax shield
37. Concentrate on mid- region of probability distribution - Relevant to owners and proxies
What lead to the exponential growth to derivatives mkt?
Performance- related metrics
Practical considerations related to ERM implementatio
Risk
38. E(Ri) = Rf + beta[(E(Rm)- Rf)- (tax factor)(dividend yield for market - Rf)] + (tax factor)(dividend yield for stock - Rf)
Risk
CAPM with taxes included (equation)
Nonmarketable asset impact on CAPM
Debt overhang
39. When negative taxable income is moved to a different year to offset future or past taxable income
Carry- backs and carry- forwards
Where is risk coming from
Solvency-related metrics
Sharpe measure
40. 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
Business Risk
BTR - Below Target Risk
Standard deviation of two assets
Liquidity risk
41. Both probability and cost of tail events are considered
Risk
Tail VaR or TCE - Tail Conditional Expectation(TCE)
Financial risks
Nonmarketable asset impact on CAPM
42. (E(Rp) - MAR)/(sqrt((1/T)summation(Rpt- MAR)^2) - MAR - minimum acceptable return
Ri = ai + bi1l1 + bi2l2....+ei
Sortino ratio
Options motivation on volatility
Three main reasons for financial disasters
43. Future price is greater than the spot price
BTR - Below Target Risk
Contango
Credit event
Financial risks
44. Law of one price - Homogeneous expectations - Security returns process
APT (equation and assumptions)
BTR - Below Target Risk
Valuation vs. Risk management
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
45. Sqrt((Xa^2)(variance of a) + (1- Xa)^2(variance of b) + 2(Xa)(1- Xa)(covariance))
Standard deviation of two assets
Ten assumptions underlying CAPM
Parametric VaR
Settlement risk
46. 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
Traits of ERM
Risk types addressed by ERM
Financial risks
Basis
47. Risk- adjusted rating (RAR) - Difference between relative returns and relative risk
Morningstar Rating System
Efficient frontier
Practical considerations related to ERM implementatio
APT for passive portfolio management
48. 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
Business risks
LTCM
Performance- related metrics
Solvency-related metrics
49. Gamma = market price of the consumption beta - Beta = E(r) of zero consumption beta
Effect of non- price- taking behavior on CAPM
Treynor measure
Ri = Rz + (gamma)(beta)
Traits of ERM
50. Credit risk that occurs when there is a change in the counterparty's ability to perform its obligations
Uncertainty
Ten assumptions underlying CAPM
Risk types addressed by ERM
Credit event