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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. Interest rate movements - derivatives - defaults






2. 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






3. Return is linearly related to growth rate in consumption






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






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






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






7. Wrong distribution - Historical sample may not apply






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






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






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






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






12. 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






13. Rp = XaRa + XbRb






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






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






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






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






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






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






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






21. Hazard - Financial - Operational - Strategic






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






23. 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 -






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






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






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






27. 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






28. 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






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






30. Quantile of a statistical distribution






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






32. Quantile of an empirical distribution






33. 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






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






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






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






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






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






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






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






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






42. Sqrt((Xa^2)(variance of a) + (1- Xa)^2(variance of b) + 2(Xa)(1- Xa)(covariance))






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






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






45. 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.






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






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






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






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






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