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






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






3. 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






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






5. 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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6. Quantile of an empirical distribution






7. 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






8. Wrong distribution - Historical sample may not apply






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






10. Rp = XaRa + XbRb






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






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






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






14. Strategic risk - Business risk - Reputational risk






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






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






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






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






19. 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






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






21. Volatility of unexpected outcomes






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






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






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






25. 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






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






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






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






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






30. 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






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






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






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






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






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






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






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

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






39. Return is linearly related to growth rate in consumption






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






41. 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






42. 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






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






44. Interest rate movements - derivatives - defaults






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






46. Both probability and cost of tail events are considered






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






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






49. Future price is greater than the spot price






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