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






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






3. 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






4. Percentile of the distribution corresponding to the point which capital is exhausted - Typically - a minimum acceptable probability of ruin is specified - and economic capital is derived from it






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






6. 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






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






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






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






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






11. Potential amount that can be lost






12. Rp = XaRa + XbRb






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






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






15. Multibeta CAPM Ri - Rf =






16. 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 -






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






18. 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






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






20. 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






21. 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






22. Capital structure (financial distress) - Taxes - Agency and information asymmetries






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






24. 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


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






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






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






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






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






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






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






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






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






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






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






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






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






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






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






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






41. 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






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






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






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






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






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






47. Asset-liability/market-liquidity risk






48. Both probability and cost of tail events are considered






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






50. Strategic risk - Business risk - Reputational risk