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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. 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






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






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






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






6. Multibeta CAPM Ri - Rf =






7. Asset-liability/market-liquidity risk






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






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






10. Return is linearly related to growth rate in consumption






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






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






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






14. Future price is greater than the spot price






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






16. 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






17. Rp = XaRa + XbRb






18. Both probability and cost of tail events are considered






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






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






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






22. 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






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






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






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






26. Volatility of unexpected outcomes






27. Wrong distribution - Historical sample may not apply






28. Changes in vol - implied or actual






29. Quantile of an empirical distribution






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






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






32. 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






33. Summarizes the worst loss over a period that will not be exceeded by a given level of confidence - Always one tailed






34. 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






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






36. Strategic risk - Business risk - Reputational risk






37. 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






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






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






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






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






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






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






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






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






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






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






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






49. 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






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