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. Hazard - Financial - Operational - Strategic






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






3. 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






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






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






6. 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






7. Market risk - Liquidity risk - Credit risk - Operational risk






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






9. Changes in vol - implied or actual






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






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






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






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






14. ex. Human capital - Equilibrium return can be higher or lower than it is under standard CAPM






15. Strategic risk - Business risk - Reputational risk






16. Asset-liability/market-liquidity risk






17. 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






18. Misleading reporting (incorrect market info) - Due to large market moves - Due to conduct of customer business






19. Quantile of a statistical distribution






20. Quantile of an empirical distribution






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






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






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






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






25. Rp = XaRa + XbRb






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






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






28. Valuation focuses on mean of distribution vs risk mgmt focuses on potential variation in payoffs - needs more precision for pricing - VAR doesn't b/c noise cancels out






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






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






31. 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






32. Cannot exit position in market due to size of the position






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






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






35. 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






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






37. 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






38. 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






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






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






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






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






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






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






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






46. Return is linearly related to growth rate in consumption






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






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






49. 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.






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