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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. 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.






2. 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 -






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






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






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






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






7. Wrong distribution - Historical sample may not apply






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






9. Market risk - Liquidity risk - Credit risk - Operational risk






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






11. 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






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






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






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






15. Risk replaced with VaR (Portfolio return - risk free rate)/(portfolio VaR/initial value of portfolio)






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






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






18. 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






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






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






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






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






23. Liquidity and maturity transformation - Brokers - Reduces transaction and information costs between households and corporations






24. 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






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






26. Asset-liability/market-liquidity risk






27. IR = (E(Rp) - E(Rb))/(std dev(Rp- Rb)) - Evaluate manager of a benchmark fund






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






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






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






31. Losses due to market activities ex. Interest rate changes or defaults






32. 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






33. Future price is greater than the spot price






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






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






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






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






38. Both probability and cost of tail events are considered






39. Interest rate movements - derivatives - defaults






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






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






42. 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






43. Xmvp = ((variance of b) - covariance)/((variance of a) + (variance of b) - 2 * covariance)






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






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






46. Changes in vol - implied or actual






47. Hazard - Financial - Operational - Strategic






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






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






50. Capital structure (financial distress) - Taxes - Agency and information asymmetries






Can you answer 50 questions in 15 minutes?



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