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






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






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






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






5. Volatility of unexpected outcomes






6. Gamma = market price of the consumption beta - Beta = E(r) of zero consumption beta






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






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






9. Changes in vol - implied or actual






10. 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






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






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






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






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






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






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






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






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






19. Return is linearly related to growth rate in consumption






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






21. Wrong distribution - Historical sample may not apply






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






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






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






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






26. 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






27. 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






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






29. May not scale over time- Historical data may be meaningless - Not designed to account for catastrophes - VaR says nothing about losses in excess of VaR - May not handle sudden illiquidity






30. Interest rate movements - derivatives - defaults






31. Multibeta CAPM Ri - Rf =






32. Quantile of an empirical distribution






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






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






35. 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


36. 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






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






38. 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 -






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






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






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






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






43. Leeson took large speculative position in Nikkei 225 disguised as safe transactions by fake customers - Earthquake increased volatility and destroyed short put options - Losses of 1.25 billion and forced bankruptcy - Necessity of an independent tradi






44. 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






45. Hazard - Financial - Operational - Strategic






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






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






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






49. Law of one price - Homogeneous expectations - Security returns process






50. Market risk - Liquidity risk - Credit risk - Operational risk