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






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






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






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






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






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






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






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






10. Interest rate movements - derivatives - defaults






11. Relationship drawn from CML - RAP = [(market std dev)/(portfolio std dev)]*(Portfolio return - risk free rate) + risk free rate - annualized






12. Potential amount that can be lost






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






14. Multibeta CAPM Ri - Rf =






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






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






17. John Rusnak - a currency option trader - produced losses of 691 million by using imaginary trades to disguise large naked positions. - Enforced need for back office controls






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






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






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






21. Covariance = correlation coefficient std dev(a) std dev(b)






22. 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






23. 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






24. Market risk - Liquidity risk - Credit risk - Operational risk






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






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






27. 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






28. Quantile of an empirical distribution






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






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






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






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






33. Changes in vol - implied or actual






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






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






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






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






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






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






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






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






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






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






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






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






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






47. 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






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






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






50. Asset-liability/market-liquidity risk