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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. Hazard - Financial - Operational - Strategic






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






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






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






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






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






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






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






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






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






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






12. 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






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






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






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






16. Country specific - Foreign exchange controls that prohibit counterparty's obligations






17. Rp = XaRa + XbRb






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






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






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






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






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






23. 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






24. Law of one price - Homogeneous expectations - Security returns process






25. Enterprise Risk Management - ERM is a discipline - culture of enterprise - ERM applies to all industries - ERM is not just defensive - adds value - ERM encompasses all risks - ERM addresses all stakeholders






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






27. Multibeta CAPM Ri - Rf =






28. Both probability and cost of tail events are considered






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






30. Absolute and relative risk - direction and non-directional






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






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






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






34. Volatility of unexpected outcomes






35. Concentrate on mid- region of probability distribution - Relevant to owners and proxies






36. 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.






37. Valuation focuses on mean of distribution vs risk mgmt focuses on potential variation in payoffs - needs more precision for pricing - VAR doesn't b/c noise cancels out






38. Return is linearly related to growth rate in consumption






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






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






41. Quantile of a statistical distribution






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






43. 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






44. 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






45. Strategic risk - Business risk - Reputational risk






46. 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






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






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

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






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