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






2. Volatility of unexpected outcomes






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






4. Strategic risk - Business risk - Reputational risk






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






6. Future price is greater than the spot price






7. Quantile of a statistical distribution






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






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






10. 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






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






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






13. Multibeta CAPM Ri - Rf =






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






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






16. 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


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






18. Hazard - Financial - Operational - Strategic






19. Enterprise Risk Management - ERM is a discipline - culture of enterprise - ERM applies to all industries - ERM is not just defensive - adds value - ERM encompasses all risks - ERM addresses all stakeholders






20. 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






21. 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






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






23. 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 -






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






25. Interest rate movements - derivatives - defaults






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






27. Return is linearly related to growth rate in consumption






28. 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






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






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






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






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






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






34. 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






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






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






37. 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






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






39. 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.






40. 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






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






42. Probability that a random variable falls below a specified threshold level






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






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






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






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






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






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






49. Changes in vol - implied or actual






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