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






2. 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






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






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






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






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






7. Potential amount that can be lost






8. Asset-liability/market-liquidity risk






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






10. 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






11. 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






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






13. 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






14. Volatility of unexpected outcomes






15. 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






16. Quantile of a statistical distribution






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






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






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






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






21. Simple form of CAPM - but market price of risk is lower than if all investors were price takers






22. Losses due to market activities ex. Interest rate changes or defaults






23. Both probability and cost of tail events are considered






24. Changes in vol - implied or actual






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






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






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






28. Interest rate movements - derivatives - defaults






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






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






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






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






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






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






35. No transaction costs - assets infinitely divisible - no personal tax - perfect competition - investors only care about mean and variance - short- selling allowed - unlimited lending and borrowing - homogeneity: single period - homogeneity: same mean






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






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






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






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






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






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






42. Valuation focuses on mean of distribution vs risk mgmt focuses on potential variation in payoffs - needs more precision for pricing - VAR doesn't b/c noise cancels out






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






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






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






46. 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






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






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






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






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