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






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






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






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






5. 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






6. 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






7. Strategic risk - Business risk - Reputational risk






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






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






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






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

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






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






14. Return is linearly related to growth rate in consumption






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






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






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






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






19. Market risk - Liquidity risk - Credit risk - Operational risk






20. 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






21. 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






22. 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






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






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






25. 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






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






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






28. Quantile of an empirical distribution






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






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






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






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






33. 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






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






35. Wrong distribution - Historical sample may not apply






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






37. 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






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






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






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






41. Capital Asset Pricing Model Ri = Rf + beta*(Rm - Rf)






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






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






44. Need to assess risk and tell management so they can determine which risks to take on






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






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






47. 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






48. Multibeta CAPM Ri - Rf =






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






50. Interest rate movements - derivatives - defaults