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. Return is linearly related to growth rate in consumption






2. Wrong distribution - Historical sample may not apply






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






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






5. Market risk - Liquidity risk - Credit risk - Operational risk






6. 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






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






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






9. 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


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






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






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






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






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






15. Potential amount that can be lost






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






17. 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






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






19. Multibeta CAPM Ri - Rf =






20. Interest rate movements - derivatives - defaults






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






22. 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






23. 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






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






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






26. 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






27. 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 -






28. 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






29. Returns on any stock are linearly related to a set of indexes






30. Changes in vol - implied or actual






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






32. The uses of debt to fall into a lower tax rate






33. 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






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






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






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






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






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






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






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






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






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






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






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






45. 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


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






47. 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






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






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






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