SUBJECTS
|
BROWSE
|
CAREER CENTER
|
POPULAR
|
JOIN
|
LOGIN
Business Skills
|
Soft Skills
|
Basic Literacy
|
Certifications
About
|
Help
|
Privacy
|
Terms
|
Email
Search
Test your basic knowledge |
FRM: Foundations Of Risk Management
Start Test
Study First
Subjects
:
business-skills
,
certifications
,
frm
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. Capital structure (financial distress) - Taxes - Agency and information asymmetries
Credit event
Market imperfections that can create value
Nonmarketable asset impact on CAPM
Drysdale Securities (Chase Manhattan)
2. Misleading reporting (incorrect market info) - Due to large market moves - Due to conduct of customer business
Three main reasons for financial disasters
Financial Risk
VaR- based analysis (formula)
Probability of ruin
3. IR = (E(Rp) - E(Rb))/(std dev(Rp- Rb)) - Evaluate manager of a benchmark fund
Shape of portfolio possibilities curve
Information ratio
BTR - Below Target Risk
Recovery rate
4. CAPM requires the strong form of the Efficient Market Hypothesis = private information
Standard deviation of two assets
Business risks
CAPM assumption for EMH
Basis
5. 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
Ways risk can be mismeasured
Drysdale Securities (Chase Manhattan)
Zero- beta CAPM (two factor model)
Business Risk
6. Concave function that extends from minimum variance portfolio to maximum return portfolio
LTCM
Kidder Peabody
CAPM with taxes included (equation)
Efficient frontier
7. Relative portfolio risk (RRiskp) - Based on a one- month investment period
Shortcomings of risk metrics
Funding liquidity risk
RAR = relative return of portfolio (RRp)
Business risks
8. Economic Cost of Ruin(ECOR) - Enhancement to probability of ruin where severity of ruin is reflected
CAPM assumption for EMH
Nonmarketable asset impact on CAPM
EPD or ECOR - Expected Policyholder Deficit (EPD)
Asset transformers
9. Long in options = expecting volatility increase - Short in options = expecting volatility decrease
Options motivation on volatility
Correlation coefficient effect on diversification
Practical considerations related to ERM implementatio
Valuation vs. Risk management
10. Efficient frontier with inclusion of risk free rate - Straight line with formula Rc = Rf + ((Ra - Rf)/std dev(a))*std dev(c) - c is the total portfolio - a is the risky asset
Kidder Peabody
Morningstar Rating System
CAPM assumption for EMH
Capital market line (CML)
11. Risks that are assumed willingly - to gain a competitive edge or add shareholder value
Recovery rate
Standard deviation of two assets
Prices of risk vs sensitivity
Business risks
12. Losses due to market activities ex. Interest rate changes or defaults
Financial risks
Options motivation on volatility
Information ratio
Drysdale Securities (Chase Manhattan)
13. When negative taxable income is moved to a different year to offset future or past taxable income
Treynor measure
Information ratio
Carry- backs and carry- forwards
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
14. E(Ri) = Rf + beta[(E(Rm)- Rf)- (tax factor)(dividend yield for market - Rf)] + (tax factor)(dividend yield for stock - Rf)
Contango
Information ratio
Allied Irish Bank
CAPM with taxes included (equation)
15. Gamma = market price of the consumption beta - Beta = E(r) of zero consumption beta
Treynor measure
Ri = Rz + (gamma)(beta)
Information ratio
LTCM
16. Derives value from an underlying asset - rate - or index - Derives value from a security
Derivative contract
Effect of heterogeneous expectations on CAPM
BTR - Below Target Risk
Source of need for risk management
17. Probability distribution is unknown (ex. A terrorist attack)
CAPM assumption for EMH
Uncertainty
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
Asset transformers
18. Managing risks is a core activity at financial companies - Industrial companies hedge financial risks
Business risks
Basic Market risk
Differences in financial risk management for financial companies vs industrial companies
Importance of communication for risk managers
19. 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
Performance- related metrics
Forms of Market risk
3 main types of operational risk
Ways firms can fail to account for risks
20. The lower (closer to - 1) - the higher the payoff from diversification
Correlation coefficient effect on diversification
Debt overhang
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
Risk types addressed by ERM
21. Risk- adjusted rating (RAR) - Difference between relative returns and relative risk
Funding liquidity risk
Shortfall risk
Jensen's alpha
Morningstar Rating System
22. Need to assess risk and tell management so they can determine which risks to take on
Morningstar Rating System
Importance of communication for risk managers
Sovereign risk
Debt overhang
23. Prices of risk are common factors and do not change - Sensitivities can change
Prices of risk vs sensitivity
Allied Irish Bank
Roles of risk management
Options motivation on volatility
24. Multibeta CAPM Ri - Rf =
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
What lead to the exponential growth to derivatives mkt?
Ways firms can fail to account for risks
Formula for covariance
25. Risk of loses owing to movements in level or volatility of market prices
Basis
Funding liquidity risk
Market risk
Risk
26. Covariance = correlation coefficient std dev(a) std dev(b)
Effect of heterogeneous expectations on CAPM
Operational risk
Drysdale Securities (Chase Manhattan)
Formula for covariance
27. 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
Performance- related metrics
LTCM
Sharpe measure
Parametric VaR
28. Inability to make payment obligations (ex. Margin calls)
Funding liquidity risk
Probability of ruin
Nonparametric VaR
Business risks
29. 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
Zero- beta CAPM (two factor model)
Effect of heterogeneous expectations on CAPM
Nonmarketable asset impact on CAPM
Drysdale Securities (Chase Manhattan)
30. Wrong distribution - Historical sample may not apply
Effect of heterogeneous expectations on CAPM
Business risks
Ways risk can be mismeasured
Sortino ratio
31. Firms became multinational - - >watched xchange rates more - deregulation and globalization
Firms becoming more sensitive to changes(bank deregulation)
Forms of Market risk
Effect of heterogeneous expectations on CAPM
CAPM (formula)
32. 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
Tax shield
Sortino ratio
Asset liquidity risk
Shortcomings of risk metrics
33. Returns on any stock are linearly related to a set of indexes
Business risks
Business Risk
Shortcomings of risk metrics
Ri = ai + bi1l1 + bi2l2....+ei
34. 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
35. When firm has so much debt that it leads to making investment decisions that benefit shareholdser but affect total firm value adversely
Capital market line (CML)
Debt overhang
Differences in financial risk management for financial companies vs industrial companies
Ri = ai + bi1l1 + bi2l2....+ei
36. Risk replaced with VaR (Portfolio return - risk free rate)/(portfolio VaR/initial value of portfolio)
Standard deviation of two assets
Effect of heterogeneous expectations on CAPM
Volatility Market risk
VaR- based analysis (formula)
37. Summarizes the worst loss over a period that will not be exceeded by a given level of confidence - Always one tailed
Ten assumptions underlying CAPM
Tax shield
VaR - Value at Risk
Morningstar Rating System
38. 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
APT (equation and assumptions)
Ways risk can be mismeasured
Forms of Market risk
Probability of ruin
39. Both probability and cost of tail events are considered
Four major types of risk
Ways firms can fail to account for risks
Recovery rate
Tail VaR or TCE - Tail Conditional Expectation(TCE)
40. 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
CAPM with taxes included (equation)
Parametric VaR
Barings
Source of need for risk management
41. Credit risk that occurs when there is a change in the counterparty's ability to perform its obligations
Effect of non- price- taking behavior on CAPM
Credit event
VaR- based analysis (formula)
Ways risk can be mismeasured
42. Return is linearly related to growth rate in consumption
Multi- period version of CAPM
Valuation vs. Risk management
Kidder Peabody
3 main types of operational risk
43. The need to hedge against risks - for firms need to speculate.
Parametric VaR
Firms becoming more sensitive to changes(bank deregulation)
Derivative contract
What lead to the exponential growth to derivatives mkt?
44. 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
Probability of ruin
Kidder Peabody
Allied Irish Bank
Security (primary vs secondary)
45. Changes in vol - implied or actual
Volatility Market risk
Correlation coefficient effect on diversification
Contango
Nonparametric VaR
46. Interest rate movements - derivatives - defaults
Differences in financial risk management for financial companies vs industrial companies
Tax shield
VaR- based analysis (formula)
Financial Risk
47. Future price is greater than the spot price
APT in active portfolio management
Contango
Risk
Risks excluded from operational risk
48. Unanticipated movements in relative prices of assets in a hedged position - All hedges imply some basis risk
Jensen's alpha
Asset liquidity risk
Ways risk can be mismeasured
Basis risk
49. Make common factor beta - Build optimal portfolios - Judge valuation of securities - Track an index but enhance with stock selection
Four major types of risk
APT in active portfolio management
APT (equation and assumptions)
CAPM with taxes included (equation)
50. Focus on adverse tail of distribution - Relevant for determining economic capital (EC) requirements
Jensen's alpha
Three main reasons for financial disasters
Ri = Rz + (gamma)(beta)
Solvency-related metrics
Sorry!:) No result found.
Can you answer 50 questions in 15 minutes?
Let me suggest you:
Browse all subjects
Browse all tests
Most popular tests
Major Subjects
Tests & Exams
AP
CLEP
DSST
GRE
SAT
GMAT
Certifications
CISSP go to https://www.isc2.org/
PMP
ITIL
RHCE
MCTS
More...
IT Skills
Android Programming
Data Modeling
Objective C Programming
Basic Python Programming
Adobe Illustrator
More...
Business Skills
Advertising Techniques
Business Accounting Basics
Business Strategy
Human Resource Management
Marketing Basics
More...
Soft Skills
Body Language
People Skills
Public Speaking
Persuasion
Job Hunting And Resumes
More...
Vocabulary
GRE Vocab
SAT Vocab
TOEFL Essential Vocab
Basic English Words For All
Global Words You Should Know
Business English
More...
Languages
AP German Vocab
AP Latin Vocab
SAT Subject Test: French
Italian Survival
Norwegian Survival
More...
Engineering
Audio Engineering
Computer Science Engineering
Aerospace Engineering
Chemical Engineering
Structural Engineering
More...
Health Sciences
Basic Nursing Skills
Health Science Language Fundamentals
Veterinary Technology Medical Language
Cardiology
Clinical Surgery
More...
English
Grammar Fundamentals
Literary And Rhetorical Vocab
Elements Of Style Vocab
Introduction To English Major
Complete Advanced Sentences
Literature
Homonyms
More...
Math
Algebra Formulas
Basic Arithmetic: Measurements
Metric Conversions
Geometric Properties
Important Math Facts
Number Sense Vocab
Business Math
More...
Other Major Subjects
Science
Economics
History
Law
Performing-arts
Cooking
Logic & Reasoning
Trivia
Browse all subjects
Browse all tests
Most popular tests