Test your basic knowledge |

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






2. 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






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






4. 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






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






6. 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






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






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






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






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






11. Quantile of a statistical distribution






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






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






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






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






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






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






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






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






21. Asset-liability/market-liquidity risk






22. Return is linearly related to growth rate in consumption






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






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






25. 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






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






27. Potential amount that can be lost






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






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






30. 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






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






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






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






34. Market risk - Liquidity risk - Credit risk - Operational risk






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






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






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






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






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






40. Cannot exit position in market due to size of the position






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






42. 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 -






43. Interest rate movements - derivatives - defaults






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






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






46. Future price is greater than the spot price






47. E(Ri) = Rf + beta[(E(Rm)- Rf)- (tax factor)(dividend yield for market - Rf)] + (tax factor)(dividend yield for stock - Rf)






48. 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


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






50. 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