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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. 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






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






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






4. Economic Cost of Ruin(ECOR) - Enhancement to probability of ruin where severity of ruin is reflected






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






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






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






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






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






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






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






12. Rp = XaRa + XbRb






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






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






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






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






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






18. Potential amount that can be lost






19. 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






20. Multibeta CAPM Ri - Rf =






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






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






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






24. 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






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






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






27. Changes in vol - implied or actual






28. 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






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






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






31. 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.






32. Curve must be concave - Straight line connecting any two points must be under the curve






33. Market risk - Liquidity risk - Credit risk - Operational risk






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

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35. 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






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






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






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






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






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






41. Return is linearly related to growth rate in consumption






42. 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






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






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






45. 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






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






47. Future price is greater than the spot price






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






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






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