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






2. Risk- adjusted rating (RAR) - Difference between relative returns and relative risk






3. Market risk - Liquidity risk - Credit risk - Operational risk






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






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






6. Return is linearly related to growth rate in consumption






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






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






9. Asset-liability/market-liquidity risk






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






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






12. 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






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






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






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






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






17. 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






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






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






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






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






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






23. 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






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






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






26. Interest rate movements - derivatives - defaults






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






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






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






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






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






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






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






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






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






36. Volatility of unexpected outcomes






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






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






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






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






41. Relationship drawn from CML - RAP = [(market std dev)/(portfolio std dev)]*(Portfolio return - risk free rate) + risk free rate - annualized






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






43. 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






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






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






46. Future price is greater than the spot price






47. 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






48. Hazard - Financial - Operational - Strategic






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






50. 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