SUBJECTS
|
BROWSE
|
CAREER CENTER
|
POPULAR
|
JOIN
|
LOGIN
Business Skills
|
Soft Skills
|
Basic Literacy
|
Certifications
About
|
Help
|
Privacy
|
Terms
|
Email
Search
Test your basic knowledge |
FRM: Foundations Of Risk Management
Start Test
Study First
Subjects
:
business-skills
,
certifications
,
frm
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. Efficient frontier with inclusion of risk free rate - Straight line with formula Rc = Rf + ((Ra - Rf)/std dev(a))*std dev(c) - c is the total portfolio - a is the risky asset
Information ratio
Capital market line (CML)
Solvency-related metrics
Risks excluded from operational risk
2. E(Ri) = Rf + beta[(E(Rm)- Rf)- (tax factor)(dividend yield for market - Rf)] + (tax factor)(dividend yield for stock - Rf)
3 main types of operational risk
Effect of heterogeneous expectations on CAPM
Drysdale Securities (Chase Manhattan)
CAPM with taxes included (equation)
3. Covariance = correlation coefficient std dev(a) std dev(b)
Basis risk
Uncertainty
Tail VaR or TCE - Tail Conditional Expectation(TCE)
Formula for covariance
4. Quantile of a statistical distribution
Security (primary vs secondary)
APT for passive portfolio management
RAR = relative return of portfolio (RRp)
Parametric VaR
5. Credit risk that occurs when there is a change in the counterparty's ability to perform its obligations
Credit event
Funding liquidity risk
Basis risk
Risk types addressed by ERM
6. Misleading reporting (incorrect market info) - Due to large market moves - Due to conduct of customer business
Three main reasons for financial disasters
Firms becoming more sensitive to changes(bank deregulation)
Drysdale Securities (Chase Manhattan)
Formula for covariance
7. Rp = XaRa + XbRb
Tracking error
Expected return of two assets
Debt overhang
APT for passive portfolio management
8. Firms became multinational - - >watched xchange rates more - deregulation and globalization
Firms becoming more sensitive to changes(bank deregulation)
Differences in financial risk management for financial companies vs industrial companies
Solvency-related metrics
Basis risk
9. Concave function that extends from minimum variance portfolio to maximum return portfolio
Asset transformers
Efficient frontier
Options motivation on volatility
Formula for covariance
10. Too much debt - Causes shareholders to seek projects that create short term capital but long term losses
Debt overhang
Settlement risk
Solvency-related metrics
Shape of portfolio possibilities curve
11. IR = (E(Rp) - E(Rb))/(std dev(Rp- Rb)) - Evaluate manager of a benchmark fund
CAPM assumption for EMH
Risk- adjusted performance measure (RAP)
Shortcomings of risk metrics
Information ratio
12. Risks that are assumed willingly - to gain a competitive edge or add shareholder value
CAPM with taxes included (equation)
Business risks
Credit event
Exposure
13. Loss resulting from inadequate/failed internal processes - people or systems - back-office problems - settlement - etc - reconciliation
Asset liquidity risk
VaR - Value at Risk
Drysdale Securities (Chase Manhattan)
Operational risk
14. Potential amount that can be lost
Nonmarketable asset impact on CAPM
Exposure
Forms of Market risk
Contango
15. 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
Correlation coefficient effect on diversification
Parametric VaR
Drysdale Securities (Chase Manhattan)
Source of need for risk management
16. ex. Human capital - Equilibrium return can be higher or lower than it is under standard CAPM
Effect of non- price- taking behavior on CAPM
Nonmarketable asset impact on CAPM
Effect of heterogeneous expectations on CAPM
Tail VaR or TCE - Tail Conditional Expectation(TCE)
17. Human - created: business cycles - inflation - govt policy changes - wars - Natural: weather - quakes
Three main reasons for financial disasters
Financial Risk
Market risk
Where is risk coming from
18. Proportion of loss that is recovered - Also referred to as "cents on the dollar"
Effect of heterogeneous expectations on CAPM
Debt overhang
Zero- beta CAPM (two factor model)
Recovery rate
19. Focus on adverse tail of distribution - Relevant for determining economic capital (EC) requirements
Allied Irish Bank
Capital market line (CML)
Solvency-related metrics
Asset transformers
20. Relationship drawn from CML - RAP = [(market std dev)/(portfolio std dev)]*(Portfolio return - risk free rate) + risk free rate - annualized
Risk- adjusted performance measure (RAP)
Exposure
Asset liquidity risk
Parametric VaR
21. When negative taxable income is moved to a different year to offset future or past taxable income
Carry- backs and carry- forwards
Business risks
Asset transformers
Recovery rate
22. Relative portfolio risk (RRiskp) - Based on a one- month investment period
Derivative contract
Ri = ai + bi1l1 + bi2l2....+ei
Tracking error
RAR = relative return of portfolio (RRp)
23. Losses due to market activities ex. Interest rate changes or defaults
Basis risk
Shortcomings of risk metrics
Financial risks
Liquidity risk
24. Risk- adjusted rating (RAR) - Difference between relative returns and relative risk
Morningstar Rating System
Risk- adjusted performance measure (RAP)
Shortcomings of risk metrics
Effect of non- price- taking behavior on CAPM
25. Economic Cost of Ruin(ECOR) - Enhancement to probability of ruin where severity of ruin is reflected
Nonparametric VaR
CAPM assumption for EMH
EPD or ECOR - Expected Policyholder Deficit (EPD)
Sortino ratio
26. The uses of debt to fall into a lower tax rate
CAPM assumption for EMH
Jensen's alpha
Tracking error
Tax shield
27. Interest rate movements - derivatives - defaults
Financial Risk
VaR - Value at Risk
Practical considerations related to ERM implementatio
Parametric VaR
28. Capital structure (financial distress) - Taxes - Agency and information asymmetries
BTR - Below Target Risk
Market imperfections that can create value
Probability of ruin
Asset liquidity risk
29. Unanticipated movements in relative prices of assets in hedged position
Drysdale Securities (Chase Manhattan)
Risk Management Irrelevance Proposition
Basic Market risk
Exposure
30. Liquidity and maturity transformation - Brokers - Reduces transaction and information costs between households and corporations
Practical considerations related to ERM implementatio
Asset transformers
Security (primary vs secondary)
Derivative contract
31. Changes in vol - implied or actual
APT in active portfolio management
Volatility Market risk
Effect of non- price- taking behavior on CAPM
Allied Irish Bank
32. 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
Derivative contract
Tracking error
Business Risk
Probability of ruin
33. Return is linearly related to growth rate in consumption
Multi- period version of CAPM
Volatility Market risk
Practical considerations related to ERM implementatio
Debt overhang
34. Quantile of an empirical distribution
Nonparametric VaR
Risk- adjusted performance measure (RAP)
Sovereign risk
APT (equation and assumptions)
35. 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
APT in active portfolio management
Morningstar Rating System
Models used in ERM framework
Kidder Peabody
36. Wrong distribution - Historical sample may not apply
Risk Management Irrelevance Proposition
Ways firms can fail to account for risks
Ways risk can be mismeasured
Asset transformers
37. 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 -
Source of need for risk management
Shortfall risk
Roles of risk management
Ways firms can fail to account for risks
38. Modeling approach is typically between statistical analytic models and structural simulation models
Where is risk coming from
Shortcomings of risk metrics
Security (primary vs secondary)
Models used in ERM framework
39. Risk replaced with VaR (Portfolio return - risk free rate)/(portfolio VaR/initial value of portfolio)
Practical considerations related to ERM implementatio
VaR- based analysis (formula)
Traits of ERM
Information ratio
40. Sqrt((Xa^2)(variance of a) + (1- Xa)^2(variance of b) + 2(Xa)(1- Xa)(covariance))
Standard deviation of two assets
Ways firms can fail to account for risks
Where is risk coming from
Four major types of risk
41. Excess return divided by portfolio beta Tp = (E(Rp) - Rf)/portfolio beta - Better for well diversified portfolios
Risk
VaR- based analysis (formula)
Ri = Rz + (gamma)(beta)
Treynor measure
42. Inability to make payment obligations (ex. Margin calls)
Nonparametric VaR
Basis risk
Funding liquidity risk
Correlation coefficient effect on diversification
43. When firm has so much debt that it leads to making investment decisions that benefit shareholdser but affect total firm value adversely
Kidder Peabody
Recovery rate
Security (primary vs secondary)
Debt overhang
44. Long in options = expecting volatility increase - Short in options = expecting volatility decrease
Debt overhang
Prices of risk vs sensitivity
Options motivation on volatility
Credit event
45. Law of one price - Homogeneous expectations - Security returns process
Security (primary vs secondary)
APT (equation and assumptions)
Basis risk
Volatility Market risk
46. Managing risks is a core activity at financial companies - Industrial companies hedge financial risks
Asset liquidity risk
Expected return of two assets
Differences in financial risk management for financial companies vs industrial companies
Valuation vs. Risk management
47. Curve must be concave - Straight line connecting any two points must be under the curve
Efficient frontier
3 main types of operational risk
Shape of portfolio possibilities curve
Debt overhang
48. Difference between forward price and spot price - Should approach zero as the contract approaches maturity
Basis
Financial Risk
Solve for minimum variance portfolio
Morningstar Rating System
49. People risk = fraud - etc. - Model risk = flawed valuation models - Legal risk = exposure to fines and lawsuits
Probability of ruin
3 main types of operational risk
CAPM (formula)
Traits of ERM
50. Xmvp = ((variance of b) - covariance)/((variance of a) + (variance of b) - 2 * covariance)
APT for passive portfolio management
Effect of non- price- taking behavior on CAPM
Solve for minimum variance portfolio
Recovery rate