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






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






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






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






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






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






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






8. Both probability and cost of tail events are considered






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






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






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






12. 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






13. Asset-liability/market-liquidity risk






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






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






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






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






18. Make common factor beta - Build optimal portfolios - Judge valuation of securities - Track an index but enhance with stock selection






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






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

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22. Losses due to market activities ex. Interest rate changes or defaults






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






24. Return is linearly related to growth rate in consumption






25. Future price is greater than the spot price






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






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






28. 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






29. Market risk - Liquidity risk - Credit risk - Operational risk






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






31. Quantile of an empirical distribution






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






33. Interest rate movements - derivatives - defaults






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






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






36. Quantile of a statistical distribution






37. 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






38. Changes in vol - implied or actual






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






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






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






42. Multibeta CAPM Ri - Rf =






43. 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






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






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






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






47. 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






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






49. 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






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