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






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






3. Volatility of expected outcomes - Outcomes are random but distribution is known or approximated






4. Asset-liability/market-liquidity risk






5. People risk = fraud - etc. - Model risk = flawed valuation models - Legal risk = exposure to fines and lawsuits






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






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






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






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






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






13. 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






14. Leeson took large speculative position in Nikkei 225 disguised as safe transactions by fake customers - Earthquake increased volatility and destroyed short put options - Losses of 1.25 billion and forced bankruptcy - Necessity of an independent tradi






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






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






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






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






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






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






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






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






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






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






25. May not scale over time- Historical data may be meaningless - Not designed to account for catastrophes - VaR says nothing about losses in excess of VaR - May not handle sudden illiquidity






26. 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






27. Return is linearly related to growth rate in consumption






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






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






30. Potential amount that can be lost






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






32. 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






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






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






35. Strategic risk - Business risk - Reputational risk






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






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






38. Market risk - Liquidity risk - Credit risk - Operational risk






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






40. 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






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






42. Sqrt((Xa^2)(variance of a) + (1- Xa)^2(variance of b) + 2(Xa)(1- Xa)(covariance))






43. Quantile of an empirical distribution






44. Hazard - Financial - Operational - Strategic






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






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






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






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






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






50. 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