Test your basic knowledge |

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






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






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






4. 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






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






6. Future price is greater than the spot price






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






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






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






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






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






12. Wrong distribution - Historical sample may not apply






13. 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






14. Interest rate movements - derivatives - defaults






15. 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

Warning: Invalid argument supplied for foreach() in /var/www/html/basicversity.com/show_quiz.php on line 183


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






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






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






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






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

Warning: Invalid argument supplied for foreach() in /var/www/html/basicversity.com/show_quiz.php on line 183


21. 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






22. 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






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






24. Multibeta CAPM Ri - Rf =






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






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






27. Hazard - Financial - Operational - Strategic






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






29. Return is linearly related to growth rate in consumption






30. 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






31. Security is a financial claim issued to raise capital - Primary securities are backed by real assets - Secondary securities are backed by primary securities






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






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






34. Both probability and cost of tail events are considered






35. Changes in vol - implied or actual






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






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






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






39. RM cannot increase firm value when it costs the same to bear a risk w/in the firm or outside the firm - For RM to increase firm value it must be more expensive to bear risks internally than to pay capital markets to bear them.






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






41. 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 -






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






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






44. 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






45. 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






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






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






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






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






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