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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. Risks that are assumed willingly - to gain a competitive edge or add shareholder value






2. Simple form of CAPM - but market price of risk is lower than if all investors were price takers






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






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






5. 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






6. 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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7. 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






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






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






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






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






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






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






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






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






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






17. Volatility of unexpected outcomes






18. 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 -






19. Credit risk that occurs when there is a change in the counterparty's ability to perform its obligations






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






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






22. Both probability and cost of tail events are considered






23. 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






24. 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






25. Changes in vol - implied or actual






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






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






28. Returns on any stock are linearly related to a set of indexes






29. Interest rate movements - derivatives - defaults






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






31. Strategic risk - Business risk - Reputational risk






32. 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






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






34. Proportion of loss that is recovered - Also referred to as "cents on the dollar"






35. Managing risks is a core activity at financial companies - Industrial companies hedge financial risks






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






37. Hazard - Financial - Operational - Strategic






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






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






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






41. RM cannot increase firm value when it costs the same to bear a risk w/in the firm or outside the firm - For RM to increase firm value it must be more expensive to bear risks internally than to pay capital markets to bear them.






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






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






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






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






46. Focus on adverse tail of distribution - Relevant for determining economic capital (EC) requirements






47. Potential amount that can be lost






48. Asset-liability/market-liquidity risk






49. Covariance = correlation coefficient std dev(a) std dev(b)






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