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. IR = (E(Rp) - E(Rb))/(std dev(Rp- Rb)) - Evaluate manager of a benchmark fund






2. Strategic risk - Business risk - Reputational risk






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






4. 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.






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






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






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






8. 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






9. Interest rate movements - derivatives - defaults






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






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






12. Quantile of a statistical distribution






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






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






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






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






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






18. 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






19. 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






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






21. 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


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






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






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






25. Probability distribution is unknown (ex. A terrorist attack)






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






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






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

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


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






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






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






32. Asset-liability/market-liquidity risk






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






34. 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






35. 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






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






37. Both probability and cost of tail events are considered






38. 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






39. 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






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






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






42. Volatility of unexpected outcomes






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






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






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






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






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






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






49. 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






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