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






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






3. 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






4. Wrong distribution - Historical sample may not apply






5. 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






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






7. Interest rate movements - derivatives - defaults






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






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






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






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






12. Potential amount that can be lost






13. Rp = XaRa + XbRb






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






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






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






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






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






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






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






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






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






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. 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






25. Return is linearly related to growth rate in consumption






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






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






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






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






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






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






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






33. Hazard - Financial - Operational - Strategic






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






35. Future price is greater than the spot price






36. 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






37. Quantile of an empirical distribution






38. 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






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






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






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






42. When negative taxable income is moved to a different year to offset future or past taxable income






43. Focus on adverse tail of distribution - Relevant for determining economic capital (EC) requirements






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






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






46. Unanticipated movements in relative prices of assets in a hedged position - All hedges imply some basis risk






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






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






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

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