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






2. (E(Rp) - MAR)/(sqrt((1/T)summation(Rpt- MAR)^2) - MAR - minimum acceptable return






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






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






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






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






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






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






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






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






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






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






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






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






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






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






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






18. Quantile of a statistical distribution






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






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






21. Market risk - Liquidity risk - Credit risk - Operational risk






22. Potential amount that can be lost






23. 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 -






24. 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






25. 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






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






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






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






29. 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






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






31. Return is linearly related to growth rate in consumption






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






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






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






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






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






37. Interest rate movements - derivatives - defaults






38. Changes in vol - implied or actual






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






40. 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






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






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






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






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






45. 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






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






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






48. Multibeta CAPM Ri - Rf =






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






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