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






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






3. Quantile of an empirical distribution






4. Return is linearly related to growth rate in consumption






5. 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






6. 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






7. Both probability and cost of tail events are considered






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






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






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






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






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






13. Volatility of unexpected outcomes






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






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






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






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






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






19. RM cannot increase firm value when it costs the same to bear a risk w/in the firm or outside the firm - For RM to increase firm value it must be more expensive to bear risks internally than to pay capital markets to bear them.






20. 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






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






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






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






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






25. Future price is greater than the spot price






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






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






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






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






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






31. 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






32. 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






33. 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


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






35. Strategic risk - Business risk - Reputational risk






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






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






38. Multibeta CAPM Ri - Rf =






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






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






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






42. Changes in vol - implied or actual






43. Rp = XaRa + XbRb






44. 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






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






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






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






48. Interest rate movements - derivatives - defaults






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






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