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FRM: Foundations Of Risk Management

Instructions:
  • Answer 50 questions in 15 minutes.
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  • 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. ex. Human capital - Equilibrium return can be higher or lower than it is under standard CAPM






2. Multibeta CAPM Ri - Rf =






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






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






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






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






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






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






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






10. 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






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






12. Asset-liability/market-liquidity risk






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






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






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






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






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






18. Make common factor beta - Build optimal portfolios - Judge valuation of securities - Track an index but enhance with stock selection






19. No transaction costs - assets infinitely divisible - no personal tax - perfect competition - investors only care about mean and variance - short- selling allowed - unlimited lending and borrowing - homogeneity: single period - homogeneity: same mean






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






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






22. 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






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






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






25. 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






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






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






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






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






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






32. Potential amount that can be lost






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

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34. 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






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






36. Future price is greater than the spot price






37. Wrong distribution - Historical sample may not apply






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






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






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






41. 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






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






43. 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






44. 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






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






46. 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






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






48. Strategic risk - Business risk - Reputational risk






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






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






Can you answer 50 questions in 15 minutes?



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