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






2. Changes in vol - implied or actual






3. 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






4. Return is linearly related to growth rate in consumption






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






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






7. Multibeta CAPM Ri - Rf =






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






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






10. 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






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






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






13. 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 -






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






15. Focus on adverse tail of distribution - Relevant for determining economic capital (EC) requirements






16. 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






17. Volatility of unexpected outcomes






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






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






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






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






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






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






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






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






26. Derives value from an underlying asset - rate - or index - Derives value from a security






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






28. 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

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29. Quantile of a statistical distribution






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






31. Wrong distribution - Historical sample may not apply






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






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






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






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






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






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






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






39. Strategic risk - Business risk - Reputational risk






40. 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






41. 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






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






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






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






45. 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






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






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






48. Future price is greater than the spot price






49. 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






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







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