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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. Economic Cost of Ruin(ECOR) - Enhancement to probability of ruin where severity of ruin is reflected






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






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






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






5. Changes in vol - implied or actual






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






7. Hazard - Financial - Operational - Strategic






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






9. 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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10. 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






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






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






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






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






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






16. Quantile of an empirical distribution






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






18. 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






19. Rp = XaRa + XbRb






20. The lower (closer to - 1) - the higher the payoff from diversification






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






22. Losses due to market activities ex. Interest rate changes or defaults






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






24. Ri = Rz + (Rm - Rz)*beta - Rz = return on zero- beta portfolio






25. Volatility of unexpected outcomes






26. Returns on any stock are linearly related to a set of indexes






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






28. Excess return equated to alpha plus expected systematic return E(Rp) - Rf = alpha + beta(E(Rm) - Rf)

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






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






31. Wrong distribution - Historical sample may not apply






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






33. 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.






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






35. 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






36. 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






37. Quantile of a statistical distribution






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






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






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






41. 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






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






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






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






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






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






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






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






49. Market risk - Liquidity risk - Credit risk - Operational risk






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