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






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






3. 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






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






5. Covariance = correlation coefficient std dev(a) std dev(b)






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. Interest rate movements - derivatives - defaults






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






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






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






11. 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






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






13. 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






14. Multibeta CAPM Ri - Rf =






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






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






17. IR = (E(Rp) - E(Rb))/(std dev(Rp- Rb)) - Evaluate manager of a benchmark fund






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






19. Volatility of unexpected outcomes






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






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






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






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






24. Asset-liability/market-liquidity risk






25. 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






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






27. Return is linearly related to growth rate in consumption






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






29. 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






30. Hazard - Financial - Operational - Strategic






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






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






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






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






35. 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






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






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






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






39. 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






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






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






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






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






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






45. 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






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






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






48. Law of one price - Homogeneous expectations - Security returns process






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






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