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






2. Quantile of an empirical distribution






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






4. Capital structure (financial distress) - Taxes - Agency and information asymmetries






5. Future price is greater than the spot price






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






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






8. Potential amount that can be lost






9. Rp = XaRa + XbRb






10. Std dev between portfolio return and benchmark return TE = std dev * (Rp- Rb) - Benchmark funds






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

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






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






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






15. Return is linearly related to growth rate in consumption






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






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






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






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






20. Changes in vol - implied or actual






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






22. 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






23. 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 -






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






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






27. Losses due to market activities ex. Interest rate changes or defaults






28. Concave function that extends from minimum variance portfolio to maximum return portfolio






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






30. 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






31. 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






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






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






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






35. Market risk - Liquidity risk - Credit risk - Operational risk






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






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






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






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






40. Long in options = expecting volatility increase - Short in options = expecting volatility decrease






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






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






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






44. Sold complex derivatives to Proctor & Gamble and Gibson - Were sued due to claims that they deceived buyers - Need for better controls for matching complexity of trade with client sophistication - Need for price quotes independent of front office Met

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






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. 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






48. Multibeta CAPM Ri - Rf =






49. 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






50. Hazard - Financial - Operational - Strategic






Can you answer 50 questions in 15 minutes?



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