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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. Quantile of a statistical distribution






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






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






4. Quantile of an empirical distribution






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






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






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






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






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






10. 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






11. Volatility of unexpected outcomes






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






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






14. 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






15. 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






16. 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 -






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






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






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






20. 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






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






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






23. Both probability and cost of tail events are considered






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






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






26. Rp = XaRa + XbRb






27. Future price is greater than the spot price






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






29. 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






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






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






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






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






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






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






36. 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






37. Potential amount that can be lost






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






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






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






41. 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






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

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






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






45. Wrong distribution - Historical sample may not apply






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






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






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






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






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