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






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






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

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4. 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






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






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






7. 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






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






9. Asset-liability/market-liquidity risk






10. 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






11. Future price is greater than the spot price






12. Volatility of unexpected outcomes






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






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






15. Interest rate movements - derivatives - defaults






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






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






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






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






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






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






22. 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






23. 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






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






25. Hazard - Financial - Operational - Strategic






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






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






28. Quantile of a statistical distribution






29. Return is linearly related to growth rate in consumption






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






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






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






33. 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 -






34. 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






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






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






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






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






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






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






41. Unanticipated movements in relative prices of assets in hedged position






42. Quantile of an empirical distribution






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






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






45. 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






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






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






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






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






50. Changes in vol - implied or actual