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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. 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






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






3. 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






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






5. Xmvp = ((variance of b) - covariance)/((variance of a) + (variance of b) - 2 * covariance)






6. 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






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






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






9. 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






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






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






12. Long in options = expecting volatility increase - Short in options = expecting volatility decrease






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






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






15. Quantile of a statistical distribution






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






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






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






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






20. Future price is greater than the spot price






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






22. 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






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






24. Quantile of an empirical distribution






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






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






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






28. Asset-liability/market-liquidity risk






29. 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






30. Make common factor beta - Build optimal portfolios - Judge valuation of securities - Track an index but enhance with stock selection






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






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






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






34. 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






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






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 distribution is unknown (ex. A terrorist attack)






38. Excess return divided by portfolio volatility (std dev) Sp = (E(Rp) - Rf)/(std dev of Rp) - Better for non- diversified portfolios






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






40. Concave function that extends from minimum variance portfolio to maximum return portfolio






41. 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






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






43. Volatility of expected outcomes - Outcomes are random but distribution is known or approximated






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






45. Potential amount that can be lost






46. Volatility of unexpected outcomes






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






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






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






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