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FRM: Foundations Of Risk Management

Instructions:
  • Answer 50 questions in 15 minutes.
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  • 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. Interest rate movements - derivatives - defaults






2. Return is linearly related to growth rate in consumption






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






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






5. 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






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






7. 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






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






9. 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






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






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






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






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






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






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






16. 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






17. Strategic risk - Business risk - Reputational risk






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






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






20. 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






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






22. 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






23. 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






24. Hazard - Financial - Operational - Strategic






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






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






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






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






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






30. Credit risk that occurs when there is a change in the counterparty's ability to perform its obligations






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






32. Changes in vol - implied or actual






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






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






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






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






37. ex. Human capital - Equilibrium return can be higher or lower than it is under standard CAPM






38. Quantile of an empirical distribution






39. Rp = XaRa + XbRb






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






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






42. 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






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






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






45. Risk replaced with VaR (Portfolio return - risk free rate)/(portfolio VaR/initial value of portfolio)






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






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






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






50. Potential amount that can be lost