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






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






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






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






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






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






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






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






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






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






11. 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






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






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






14. Wrong distribution - Historical sample may not apply






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






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






17. 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






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






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






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






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






22. 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






23. 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






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






25. 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






26. 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






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






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






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






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






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






32. Changes in vol - implied or actual






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






34. 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






35. Both probability and cost of tail events are considered






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






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






38. Future price is greater than the spot price






39. 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 -






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






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






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






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






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






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






46. 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






47. Return is linearly related to growth rate in consumption






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






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






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