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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. 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






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






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






4. 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






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






6. Unanticipated movements in relative prices of assets in a hedged position - All hedges imply some basis risk






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






8. Future price is greater than the spot price






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






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






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






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






13. Changes in vol - implied or actual






14. When firm has so much debt that it leads to making investment decisions that benefit shareholdser but affect total firm value adversely






15. Strategic risk - Business risk - Reputational risk






16. Both probability and cost of tail events are considered






17. Hazard - Financial - Operational - Strategic






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






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






20. 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


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






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






23. Wrong distribution - Historical sample may not apply






24. Market risk - Liquidity risk - Credit risk - Operational risk






25. 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






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






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






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






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






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






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






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






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






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






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






36. Rp = XaRa + XbRb






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






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






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






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






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






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






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






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






45. 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






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






47. Return is linearly related to growth rate in consumption






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






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






50. 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