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






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






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






4. Excess return equated to alpha plus expected systematic return E(Rp) - Rf = alpha + beta(E(Rm) - Rf)

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






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






7. Potential amount that can be lost






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






9. Multibeta CAPM Ri - Rf =






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






11. 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






12. 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






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






14. Volatility of unexpected outcomes






15. Return is linearly related to growth rate in consumption






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






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






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






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






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






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






22. Human - created: business cycles - inflation - govt policy changes - wars - Natural: weather - quakes






23. The uses of debt to fall into a lower tax rate






24. Interest rate movements - derivatives - defaults






25. Strategic risk - Business risk - Reputational risk






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






27. Rp = XaRa + XbRb






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






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






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






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






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






33. Need to assess risk and tell management so they can determine which risks to take on






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






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






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






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






38. Wrong distribution - Historical sample may not apply






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






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






41. Future price is greater than the spot price






42. Quantile of a statistical distribution






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






44. Hazard - Financial - Operational - Strategic






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






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






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






48. 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






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






50. 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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