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. Need to assess risk and tell management so they can determine which risks to take on
Roles of risk management
Importance of communication for risk managers
Business risks
Performance- related metrics
2. Focus on adverse tail of distribution - Relevant for determining economic capital (EC) requirements
Allied Irish Bank
Options motivation on volatility
Three main reasons for financial disasters
Solvency-related metrics
3. Xmvp = ((variance of b) - covariance)/((variance of a) + (variance of b) - 2 * covariance)
VaR - Value at Risk
Efficient frontier
Tax shield
Solve for minimum variance portfolio
4. Ri = Rz + (Rm - Rz)*beta - Rz = return on zero- beta portfolio
Barings
Zero- beta CAPM (two factor model)
Financial Risk
Sortino ratio
5. Volatility of unexpected outcomes
Operational risk
Risk
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
Shortfall risk
6. Gamma = market price of the consumption beta - Beta = E(r) of zero consumption beta
Kidder Peabody
RAR = relative return of portfolio (RRp)
Ways firms can fail to account for risks
Ri = Rz + (gamma)(beta)
7. Prices of risk are common factors and do not change - Sensitivities can change
Jensen's alpha
Morningstar Rating System
Models used in ERM framework
Prices of risk vs sensitivity
8. Too much debt - Causes shareholders to seek projects that create short term capital but long term losses
Contango
Solve for minimum variance portfolio
Risk
Debt overhang
9. Changes in vol - implied or actual
Firms becoming more sensitive to changes(bank deregulation)
Importance of communication for risk managers
Ten assumptions underlying CAPM
Volatility Market risk
10. 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
What lead to the exponential growth to derivatives mkt?
Drysdale Securities (Chase Manhattan)
Correlation coefficient effect on diversification
Credit event
11. CAPM requires the strong form of the Efficient Market Hypothesis = private information
Ways risk can be mismeasured
Shortcomings of risk metrics
CAPM assumption for EMH
Sovereign risk
12. Absolute and relative risk - direction and non-directional
Treynor measure
Forms of Market risk
Carry- backs and carry- forwards
Shortcomings of risk metrics
13. ex. Human capital - Equilibrium return can be higher or lower than it is under standard CAPM
Parametric VaR
Zero- beta CAPM (two factor model)
Nonmarketable asset impact on CAPM
APT (equation and assumptions)
14. (E(Rp) - MAR)/(sqrt((1/T)summation(Rpt- MAR)^2) - MAR - minimum acceptable return
Correlation coefficient effect on diversification
Contango
Shortfall risk
Sortino ratio
15. The need to hedge against risks - for firms need to speculate.
What lead to the exponential growth to derivatives mkt?
Performance- related metrics
Uncertainty
Correlation coefficient effect on diversification
16. Expected value of unfavorable deviations of a random variable from a specified target level
Traits of ERM
BTR - Below Target Risk
Allied Irish Bank
Risk types addressed by ERM
17. When negative taxable income is moved to a different year to offset future or past taxable income
Carry- backs and carry- forwards
LTCM
Differences in financial risk management for financial companies vs industrial companies
Asset liquidity risk
18. Long in options = expecting volatility increase - Short in options = expecting volatility decrease
Effect of non- price- taking behavior on CAPM
Expected return of two assets
Options motivation on volatility
Differences in financial risk management for financial companies vs industrial companies
19. Return is linearly related to growth rate in consumption
Information ratio
Debt overhang
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
Multi- period version of CAPM
20. Relationship drawn from CML - RAP = [(market std dev)/(portfolio std dev)]*(Portfolio return - risk free rate) + risk free rate - annualized
Shape of portfolio possibilities curve
APT for passive portfolio management
Risk- adjusted performance measure (RAP)
Drysdale Securities (Chase Manhattan)
21. Wrong distribution - Historical sample may not apply
Ways firms can fail to account for risks
Models used in ERM framework
EPD or ECOR - Expected Policyholder Deficit (EPD)
Ways risk can be mismeasured
22. Covariance = correlation coefficient std dev(a) std dev(b)
Valuation vs. Risk management
Formula for covariance
Jensen's alpha
APT (equation and assumptions)
23. Asses firm risks - Communicate risks - Manage and monitor risks
VaR- based analysis (formula)
CAPM with taxes included (equation)
Carry- backs and carry- forwards
Roles of risk management
24. Security is a financial claim issued to raise capital - Primary securities are backed by real assets - Secondary securities are backed by primary securities
Shape of portfolio possibilities curve
Security (primary vs secondary)
Tail VaR or TCE - Tail Conditional Expectation(TCE)
Ten assumptions underlying CAPM
25. Concentrate on mid- region of probability distribution - Relevant to owners and proxies
Prices of risk vs sensitivity
Forms of Market risk
Performance- related metrics
Importance of communication for risk managers
26. 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
Ways firms can fail to account for risks
Ten assumptions underlying CAPM
Risk- adjusted performance measure (RAP)
Basis
27. 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
Credit event
Liquidity risk
LTCM
Allied Irish Bank
28. Capital Asset Pricing Model Ri = Rf + beta*(Rm - Rf)
Effect of heterogeneous expectations on CAPM
CAPM (formula)
Efficient frontier
Tracking error
29. 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
Shortcomings of risk metrics
Contango
APT in active portfolio management
Treynor measure
30. Interest rate movements - derivatives - defaults
Risk- adjusted performance measure (RAP)
Standard deviation of two assets
Market imperfections that can create value
Financial Risk
31. Multibeta CAPM Ri - Rf =
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
Recovery rate
VaR- based analysis (formula)
Asset liquidity risk
32. Quantile of an empirical distribution
Financial risks
Nonparametric VaR
Contango
Business Risk
33. Unanticipated movements in relative prices of assets in a hedged position - All hedges imply some basis risk
Debt overhang
Basis risk
VaR - Value at Risk
Contango
34. Risk replaced with VaR (Portfolio return - risk free rate)/(portfolio VaR/initial value of portfolio)
Debt overhang
VaR- based analysis (formula)
Credit event
Firms becoming more sensitive to changes(bank deregulation)
35. Excess return equated to alpha plus expected systematic return E(Rp) - Rf = alpha + beta(E(Rm) - Rf)
Warning
: Invalid argument supplied for foreach() in
/var/www/html/basicversity.com/show_quiz.php
on line
183
36. 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
APT in active portfolio management
LTCM
Ways risk can be mismeasured
Banker's Trust
37. Unanticipated movements in relative prices of assets in hedged position
Basic Market risk
Risk Management Irrelevance Proposition
Morningstar Rating System
Traits of ERM
38. 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
Risk types addressed by ERM
Security (primary vs secondary)
Ten assumptions underlying CAPM
39. Loss resulting from inadequate/failed internal processes - people or systems - back-office problems - settlement - etc - reconciliation
Risk
VaR - Value at Risk
Contango
Operational risk
40. When two payments are exchanged the same day and one party may default after payment is made
Recovery rate
Kidder Peabody
Four major types of risk
Settlement risk
41. Occurs the day when two parties exchange payments same day
Shortfall risk
Probability of ruin
Settlement risk
Carry- backs and carry- forwards
42. Cannot exit position in market due to size of the position
Asset liquidity risk
Three main reasons for financial disasters
Ri = Rz + (gamma)(beta)
Shortcomings of risk metrics
43. 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
Source of need for risk management
Basis
Barings
Formula for covariance
44. 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
Shortfall risk
Risk
Standard deviation of two assets
Probability of ruin
45. Hazard - Financial - Operational - Strategic
Business Risk
Information ratio
Risk types addressed by ERM
Source of need for risk management
46. Volatility of expected outcomes - Outcomes are random but distribution is known or approximated
Risk
Carry- backs and carry- forwards
Market risk
Capital market line (CML)
47. Modeling approach is typically between statistical analytic models and structural simulation models
Models used in ERM framework
Derivative contract
APT (equation and assumptions)
Tax shield
48. IR = (E(Rp) - E(Rb))/(std dev(Rp- Rb)) - Evaluate manager of a benchmark fund
Volatility Market risk
Information ratio
Models used in ERM framework
BTR - Below Target Risk
49. Law of one price - Homogeneous expectations - Security returns process
Multi- period version of CAPM
APT (equation and assumptions)
Source of need for risk management
Settlement risk
50. Market risk - Liquidity risk - Credit risk - Operational risk
Importance of communication for risk managers
Four major types of risk
Morningstar Rating System
Asset liquidity risk