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FRM: Foundations Of Risk Management

Instructions:
  • Answer 50 questions in 15 minutes.
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  • 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. 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 -






2. Quantile of a statistical distribution






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






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






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






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






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






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






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






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






11. 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






12. 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






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






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






15. Changes in vol - implied or actual






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






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






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






19. Credit risk that occurs when there is a change in the counterparty's ability to perform its obligations






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






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






22. 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






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






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






25. 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






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






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






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






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






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






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






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






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






34. Volatility of unexpected outcomes






35. Market risk - Liquidity risk - Credit risk - Operational risk






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






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






38. 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






39. 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






40. 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






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






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






43. Strategic risk - Business risk - Reputational risk






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






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






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






47. Future price is greater than the spot price






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






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






50. Return is linearly related to growth rate in consumption