Test your basic knowledge |

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. 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






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






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






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






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






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






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






8. Both probability and cost of tail events are considered






9. Quantile of an empirical distribution






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






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






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






13. 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






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






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






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






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






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






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






20. Quantile of a statistical distribution






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






22. Rp = XaRa + XbRb






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






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






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






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






27. Future price is greater than the spot price






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






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






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






31. 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






32. John Rusnak - a currency option trader - produced losses of 691 million by using imaginary trades to disguise large naked positions. - Enforced need for back office controls






33. 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






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






35. Strategic risk - Business risk - Reputational risk






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






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






38. Volatility of unexpected outcomes






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






40. 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

Warning: Invalid argument supplied for foreach() in /var/www/html/basicversity.com/show_quiz.php on line 183


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






42. Security is a financial claim issued to raise capital - Primary securities are backed by real assets - Secondary securities are backed by primary securities






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






44. 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 -






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






46. Interest rate movements - derivatives - defaults






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






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






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






50. 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