Test your basic knowledge |

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






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






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






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






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






6. Quantile of a statistical distribution






7. Hazard - Financial - Operational - Strategic






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






9. 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






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






11. 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






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






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






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






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






16. 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 -






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






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






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






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






21. 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






22. Interest rate movements - derivatives - defaults






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






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






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






26. Changes in vol - implied or actual






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






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






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






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






31. Potential amount that can be lost






32. 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






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






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






35. 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






36. Multibeta CAPM Ri - Rf =






37. 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






38. 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






39. Both probability and cost of tail events are considered






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






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






42. 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






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






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






45. Wrong distribution - Historical sample may not apply






46. Quantile of an empirical distribution






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






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






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






50. 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