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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. 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






2. 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.






3. Wrong distribution - Historical sample may not apply






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






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






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






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






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






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






10. Quantile of a statistical distribution






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






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






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






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






15. 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






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






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






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






19. Strategic risk - Business risk - Reputational risk






20. 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






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






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






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






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






25. Excess return equated to alpha plus expected systematic return E(Rp) - Rf = alpha + beta(E(Rm) - Rf)

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26. 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






27. Both probability and cost of tail events are considered






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






29. 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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30. 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






31. Rp = XaRa + XbRb






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






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






34. Multibeta CAPM Ri - Rf =






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






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






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






38. Asset-liability/market-liquidity risk






39. 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






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






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






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






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






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






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






46. Enterprise Risk Management - ERM is a discipline - culture of enterprise - ERM applies to all industries - ERM is not just defensive - adds value - ERM encompasses all risks - ERM addresses all stakeholders






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






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






49. 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






50. Changes in vol - implied or actual