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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 an empirical distribution






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






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






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






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






6. Market risk - Liquidity risk - Credit risk - Operational risk






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






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






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






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






11. 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






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






13. Both probability and cost of tail events are considered






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






15. 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






16. Strategic risk - Business risk - Reputational risk






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






18. Potential amount that can be lost






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






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






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






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






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






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






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






26. Asset-liability/market-liquidity risk






27. Multibeta CAPM Ri - Rf =






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






29. Interest rate movements - derivatives - defaults






30. 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






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






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






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






34. Quantile of a statistical distribution






35. 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






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






37. 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


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






39. Wrong distribution - Historical sample may not apply






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






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






42. Hazard - Financial - Operational - Strategic






43. Return is linearly related to growth rate in consumption






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






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






46. Volatility of unexpected outcomes






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






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






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






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