SUBJECTS
|
BROWSE
|
CAREER CENTER
|
POPULAR
|
JOIN
|
LOGIN
Business Skills
|
Soft Skills
|
Basic Literacy
|
Certifications
About
|
Help
|
Privacy
|
Terms
|
Email
Search
Test your basic knowledge |
FRM: Foundations Of Risk Management
Start Test
Study First
Subjects
:
business-skills
,
certifications
,
frm
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. When negative taxable income is moved to a different year to offset future or past taxable income
Carry- backs and carry- forwards
Source of need for risk management
Kidder Peabody
Sharpe measure
2. Excess return divided by portfolio volatility (std dev) Sp = (E(Rp) - Rf)/(std dev of Rp) - Better for non- diversified portfolios
Sharpe measure
Efficient frontier
CAPM assumption for EMH
Risk- adjusted performance measure (RAP)
3. Unanticipated movements in relative prices of assets in hedged position
Treynor measure
Morningstar Rating System
Basic Market risk
Ri = ai + bi1l1 + bi2l2....+ei
4. Security is a financial claim issued to raise capital - Primary securities are backed by real assets - Secondary securities are backed by primary securities
Practical considerations related to ERM implementatio
Parametric VaR
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
Security (primary vs secondary)
5. Xmvp = ((variance of b) - covariance)/((variance of a) + (variance of b) - 2 * covariance)
Practical considerations related to ERM implementatio
Credit event
Information ratio
Solve for minimum variance portfolio
6. 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
Source of need for risk management
Tracking error
Solvency-related metrics
Valuation vs. Risk management
7. Capital Asset Pricing Model Ri = Rf + beta*(Rm - Rf)
Asset liquidity risk
Kidder Peabody
CAPM (formula)
Business risks
8. Ri = Rz + (Rm - Rz)*beta - Rz = return on zero- beta portfolio
LTCM
Risks excluded from operational risk
Shortfall risk
Zero- beta CAPM (two factor model)
9. Prices of risk are common factors and do not change - Sensitivities can change
Security (primary vs secondary)
Kidder Peabody
Effect of heterogeneous expectations on CAPM
Prices of risk vs sensitivity
10. 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
BTR - Below Target Risk
Correlation coefficient effect on diversification
Practical considerations related to ERM implementatio
3 main types of operational risk
11. 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 -
Performance- related metrics
Jensen's alpha
Source of need for risk management
Valuation vs. Risk management
12. 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
Allied Irish Bank
Risk types addressed by ERM
Ri = ai + bi1l1 + bi2l2....+ei
Sharpe measure
13. Future price is greater than the spot price
Models used in ERM framework
Effect of non- price- taking behavior on CAPM
Contango
Asset liquidity risk
14. Quantile of an empirical distribution
Differences in financial risk management for financial companies vs industrial companies
Nonparametric VaR
Multi- period version of CAPM
Expected return of two assets
15. Derives value from an underlying asset - rate - or index - Derives value from a security
Basic Market risk
Kidder Peabody
Funding liquidity risk
Derivative contract
16. Focus on adverse tail of distribution - Relevant for determining economic capital (EC) requirements
Carry- backs and carry- forwards
Solvency-related metrics
Risks excluded from operational risk
LTCM
17. Return is linearly related to growth rate in consumption
Drysdale Securities (Chase Manhattan)
APT in active portfolio management
Multi- period version of CAPM
Parametric VaR
18. Equilibrium can still be expressed in returns - covariance - and variance - but they become complex weighted averages
Jensen's alpha
Effect of heterogeneous expectations on CAPM
Capital market line (CML)
Security (primary vs secondary)
19. The uses of debt to fall into a lower tax rate
Operational risk
Effect of non- price- taking behavior on CAPM
Tax shield
Debt overhang
20. Losses due to market activities ex. Interest rate changes or defaults
Contango
Security (primary vs secondary)
Volatility Market risk
Financial risks
21. Excess return divided by portfolio beta Tp = (E(Rp) - Rf)/portfolio beta - Better for well diversified portfolios
Treynor measure
Traits of ERM
Kidder Peabody
Basis
22. Probability distribution is unknown (ex. A terrorist attack)
Carry- backs and carry- forwards
Volatility Market risk
APT (equation and assumptions)
Uncertainty
23. When two payments are exchanged the same day and one party may default after payment is made
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
Sovereign risk
Settlement risk
Ri = ai + bi1l1 + bi2l2....+ei
24. Joseph Jett exploited an accounting glitch to book 350 million of false profits (government bonds) - Massive misreporting resulted in loss of confidence in management - Failed to take into account the present value of a forward - Learn to investigate
LTCM
Allied Irish Bank
Nonmarketable asset impact on CAPM
Kidder Peabody
25. Too much debt - Causes shareholders to seek projects that create short term capital but long term losses
Standard deviation of two assets
Probability of ruin
VaR - Value at Risk
Debt overhang
26. Quantile of a statistical distribution
Jensen's alpha
Parametric VaR
Solvency-related metrics
Practical considerations related to ERM implementatio
27. Market risk - Liquidity risk - Credit risk - Operational risk
APT (equation and assumptions)
RAR = relative return of portfolio (RRp)
CAPM (formula)
Four major types of risk
28. 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
Business Risk
Tail VaR or TCE - Tail Conditional Expectation(TCE)
APT (equation and assumptions)
Options motivation on volatility
29. Expected value of unfavorable deviations of a random variable from a specified target level
Market imperfections that can create value
Asset liquidity risk
BTR - Below Target Risk
Banker's Trust
30. Liquidity and maturity transformation - Brokers - Reduces transaction and information costs between households and corporations
Ten assumptions underlying CAPM
VaR- based analysis (formula)
BTR - Below Target Risk
Asset transformers
31. Risk of loses owing to movements in level or volatility of market prices
Debt overhang
Sovereign risk
Market risk
Ways firms can fail to account for risks
32. 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
Traits of ERM
BTR - Below Target Risk
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
Market risk
33. Modeling approach is typically between statistical analytic models and structural simulation models
Sovereign risk
Models used in ERM framework
Shortcomings of risk metrics
APT (equation and assumptions)
34. 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
Ten assumptions underlying CAPM
Four major types of risk
Tax shield
CAPM with taxes included (equation)
35. When firm has so much debt that it leads to making investment decisions that benefit shareholdser but affect total firm value adversely
LTCM
Where is risk coming from
BTR - Below Target Risk
Debt overhang
36. Curve must be concave - Straight line connecting any two points must be under the curve
Valuation vs. Risk management
Debt overhang
Shape of portfolio possibilities curve
Correlation coefficient effect on diversification
37. Relationship drawn from CML - RAP = [(market std dev)/(portfolio std dev)]*(Portfolio return - risk free rate) + risk free rate - annualized
VaR - Value at Risk
Multi- period version of CAPM
Forms of Market risk
Risk- adjusted performance measure (RAP)
38. Credit risk that occurs when there is a change in the counterparty's ability to perform its obligations
What lead to the exponential growth to derivatives mkt?
Prices of risk vs sensitivity
Credit event
Market risk
39. 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
Valuation vs. Risk management
Ways firms can fail to account for risks
Capital market line (CML)
Sortino ratio
40. Interest rate movements - derivatives - defaults
Correlation coefficient effect on diversification
Financial Risk
Jensen's alpha
Risk
41. Economic Cost of Ruin(ECOR) - Enhancement to probability of ruin where severity of ruin is reflected
Models used in ERM framework
Tax shield
Sovereign risk
EPD or ECOR - Expected Policyholder Deficit (EPD)
42. Absolute and relative risk - direction and non-directional
Efficient frontier
Source of need for risk management
Forms of Market risk
Basis
43. Firms became multinational - - >watched xchange rates more - deregulation and globalization
Exposure
Asset transformers
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
Firms becoming more sensitive to changes(bank deregulation)
44. Misleading reporting (incorrect market info) - Due to large market moves - Due to conduct of customer business
Settlement risk
Formula for covariance
Three main reasons for financial disasters
VaR - Value at Risk
45. Managing risks is a core activity at financial companies - Industrial companies hedge financial risks
Effect of non- price- taking behavior on CAPM
Ten assumptions underlying CAPM
Differences in financial risk management for financial companies vs industrial companies
Business risks
46. Long in options = expecting volatility increase - Short in options = expecting volatility decrease
Ways firms can fail to account for risks
Basis risk
Recovery rate
Options motivation on volatility
47. People risk = fraud - etc. - Model risk = flawed valuation models - Legal risk = exposure to fines and lawsuits
3 main types of operational risk
Source of need for risk management
Practical considerations related to ERM implementatio
Carry- backs and carry- forwards
48. Both probability and cost of tail events are considered
Operational risk
Tail VaR or TCE - Tail Conditional Expectation(TCE)
Tracking error
Debt overhang
49. (E(Rp) - MAR)/(sqrt((1/T)summation(Rpt- MAR)^2) - MAR - minimum acceptable return
APT for passive portfolio management
CAPM with taxes included (equation)
Sortino ratio
Liquidity risk
50. Potential amount that can be lost
Effect of non- price- taking behavior on CAPM
Exposure
Models used in ERM framework
CAPM (formula)