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. Returns on any stock are linearly related to a set of indexes
Roles of risk management
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
Probability of ruin
Ri = ai + bi1l1 + bi2l2....+ei
2. Misleading reporting (incorrect market info) - Due to large market moves - Due to conduct of customer business
Three main reasons for financial disasters
Options motivation on volatility
What lead to the exponential growth to derivatives mkt?
LTCM
3. When negative taxable income is moved to a different year to offset future or past taxable income
Information ratio
VaR - Value at Risk
Carry- backs and carry- forwards
Nonparametric VaR
4. Difference between forward price and spot price - Should approach zero as the contract approaches maturity
Tracking error
Basis risk
Basis
BTR - Below Target Risk
5. Std dev between portfolio return and benchmark return TE = std dev * (Rp- Rb) - Benchmark funds
Forms of Market risk
Basis risk
Tracking error
Settlement risk
6. Probability distribution is unknown (ex. A terrorist attack)
Uncertainty
Valuation vs. Risk management
Basic Market risk
Banker's Trust
7. Hazard - Financial - Operational - Strategic
Drysdale Securities (Chase Manhattan)
Liquidity risk
Funding liquidity risk
Risk types addressed by ERM
8. The need to hedge against risks - for firms need to speculate.
Market imperfections that can create value
Treynor measure
What lead to the exponential growth to derivatives mkt?
Options motivation on volatility
9. Quantile of a statistical distribution
Nonparametric VaR
Market risk
Tracking error
Parametric VaR
10. Valuation focuses on mean of distribution vs risk mgmt focuses on potential variation in payoffs - needs more precision for pricing - VAR doesn't b/c noise cancels out
Effect of non- price- taking behavior on CAPM
Valuation vs. Risk management
Jensen's alpha
Three main reasons for financial disasters
11. Excess return divided by portfolio beta Tp = (E(Rp) - Rf)/portfolio beta - Better for well diversified portfolios
Liquidity risk
Sovereign risk
Treynor measure
Market risk
12. 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
Morningstar Rating System
Risk
Probability of ruin
Ways firms can fail to account for risks
13. Changes in vol - implied or actual
VaR- based analysis (formula)
Effect of heterogeneous expectations on CAPM
Volatility Market risk
Capital market line (CML)
14. 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
Basic Market risk
Derivative contract
Practical considerations related to ERM implementatio
Capital market line (CML)
15. Risk replaced with VaR (Portfolio return - risk free rate)/(portfolio VaR/initial value of portfolio)
Shape of portfolio possibilities curve
Credit event
VaR- based analysis (formula)
Volatility Market risk
16. 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
Ten assumptions underlying CAPM
Asset transformers
Exposure
Shortcomings of risk metrics
17. Prices of risk are common factors and do not change - Sensitivities can change
Prices of risk vs sensitivity
Correlation coefficient effect on diversification
Funding liquidity risk
Basis risk
18. Security is a financial claim issued to raise capital - Primary securities are backed by real assets - Secondary securities are backed by primary securities
Security (primary vs secondary)
Allied Irish Bank
Market risk
APT for passive portfolio management
19. Simple form of CAPM - but market price of risk is lower than if all investors were price takers
Effect of non- price- taking behavior on CAPM
Market risk
Settlement risk
Risks excluded from operational risk
20. Managing risks is a core activity at financial companies - Industrial companies hedge financial risks
Performance- related metrics
CAPM assumption for EMH
BTR - Below Target Risk
Differences in financial risk management for financial companies vs industrial companies
21. Unanticipated movements in relative prices of assets in a hedged position - All hedges imply some basis risk
BTR - Below Target Risk
Shape of portfolio possibilities curve
Funding liquidity risk
Basis risk
22. Sqrt((Xa^2)(variance of a) + (1- Xa)^2(variance of b) + 2(Xa)(1- Xa)(covariance))
Business risks
Standard deviation of two assets
Differences in financial risk management for financial companies vs industrial companies
Risk- adjusted performance measure (RAP)
23. Cannot exit position in market due to size of the position
Models used in ERM framework
Asset liquidity risk
Capital market line (CML)
Morningstar Rating System
24. Proportion of loss that is recovered - Also referred to as "cents on the dollar"
Expected return of two assets
Recovery rate
Asset transformers
Forms of Market risk
25. Long in options = expecting volatility increase - Short in options = expecting volatility decrease
APT for passive portfolio management
Morningstar Rating System
Options motivation on volatility
Ri = Rz + (gamma)(beta)
26. 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
27. Too much debt - Causes shareholders to seek projects that create short term capital but long term losses
Information ratio
Debt overhang
Kidder Peabody
Security (primary vs secondary)
28. Probability that a random variable falls below a specified threshold level
Shortfall risk
Solve for minimum variance portfolio
Banker's Trust
Probability of ruin
29. 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
Allied Irish Bank
Three main reasons for financial disasters
Ri = ai + bi1l1 + bi2l2....+ei
Market risk
30. Make common factor beta - Build optimal portfolios - Judge valuation of securities - Track an index but enhance with stock selection
Traits of ERM
Models used in ERM framework
Ten assumptions underlying CAPM
APT in active portfolio management
31. When two payments are exchanged the same day and one party may default after payment is made
Settlement risk
Where is risk coming from
APT (equation and assumptions)
Expected return of two assets
32. Excess return divided by portfolio volatility (std dev) Sp = (E(Rp) - Rf)/(std dev of Rp) - Better for non- diversified portfolios
Multi- period version of CAPM
APT in active portfolio management
Business Risk
Sharpe measure
33. When firm has so much debt that it leads to making investment decisions that benefit shareholdser but affect total firm value adversely
Kidder Peabody
LTCM
Debt overhang
Prices of risk vs sensitivity
34. 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
Tracking error
Ri = Rz + (gamma)(beta)
Barings
Allied Irish Bank
35. 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
CAPM (formula)
Security (primary vs secondary)
LTCM
3 main types of operational risk
36. The uses of debt to fall into a lower tax rate
Tax shield
Financial Risk
Settlement risk
Efficient frontier
37. 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
38. Modeling approach is typically between statistical analytic models and structural simulation models
Business risks
Three main reasons for financial disasters
Models used in ERM framework
Traits of ERM
39. Xmvp = ((variance of b) - covariance)/((variance of a) + (variance of b) - 2 * covariance)
Operational risk
CAPM (formula)
Prices of risk vs sensitivity
Solve for minimum variance portfolio
40. Relationship drawn from CML - RAP = [(market std dev)/(portfolio std dev)]*(Portfolio return - risk free rate) + risk free rate - annualized
Basis risk
Options motivation on volatility
Risk- adjusted performance measure (RAP)
Funding liquidity risk
41. Potential amount that can be lost
Forms of Market risk
Efficient frontier
Exposure
Source of need for risk management
42. Return is linearly related to growth rate in consumption
Solvency-related metrics
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
Multi- period version of CAPM
3 main types of operational risk
43. Interest rate movements - derivatives - defaults
Three main reasons for financial disasters
Formula for covariance
Financial Risk
Risk- adjusted performance measure (RAP)
44. Strategic risk - Business risk - Reputational risk
Risks excluded from operational risk
Morningstar Rating System
Performance- related metrics
Jensen's alpha
45. People risk = fraud - etc. - Model risk = flawed valuation models - Legal risk = exposure to fines and lawsuits
LTCM
Operational risk
3 main types of operational risk
Solve for minimum variance portfolio
46. Volatility of expected outcomes - Outcomes are random but distribution is known or approximated
Capital market line (CML)
Credit event
Multi- period version of CAPM
Risk
47. Focus on adverse tail of distribution - Relevant for determining economic capital (EC) requirements
Solvency-related metrics
Credit event
Ri = Rz + (gamma)(beta)
Ways risk can be mismeasured
48. Asset-liability/market-liquidity risk
Liquidity risk
Exposure
Risk- adjusted performance measure (RAP)
Effect of heterogeneous expectations on CAPM
49. Human - created: business cycles - inflation - govt policy changes - wars - Natural: weather - quakes
Where is risk coming from
Asset transformers
Risk Management Irrelevance Proposition
Financial risks
50. Future price is greater than the spot price
Operational risk
Contango
APT (equation and assumptions)
Options motivation on volatility