Test your basic knowledge |

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






2. Equilibrium can still be expressed in returns - covariance - and variance - but they become complex weighted averages






3. Excess return divided by portfolio volatility (std dev) Sp = (E(Rp) - Rf)/(std dev of Rp) - Better for non- diversified portfolios






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






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






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






7. 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






8. 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


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






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






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






12. 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






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






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






15. 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


16. Strategic risk - Business risk - Reputational risk






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






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






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






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






21. Asset-liability/market-liquidity risk






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






23. 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.






24. 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






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






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






27. Wrong distribution - Historical sample may not apply






28. 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






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






30. People risk = fraud - etc. - Model risk = flawed valuation models - Legal risk = exposure to fines and lawsuits






31. Multibeta CAPM Ri - Rf =






32. 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






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






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






35. Rp = XaRa + XbRb






36. Future price is greater than the spot price






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






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






39. Potential amount that can be lost






40. Interest rate movements - derivatives - defaults






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






42. 1971: Fixed Exchange rate system broke down and was replaced by more volatile floating rate - 1973: Oil price shocks - - >high inflation - - >interest rate swings - 1987: Black Monday - OCt 19 - mkt fell 23% - 1989: Japanese stock price bubble -






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






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






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






46. Proportion of loss that is recovered - Also referred to as "cents on the dollar"






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. 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






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