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






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






3. 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






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






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






6. 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






7. Potential amount that can be lost






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






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






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






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. 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






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






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






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






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






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






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






19. Return is linearly related to growth rate in consumption






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






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






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

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23. Law of one price - Homogeneous expectations - Security returns process






24. Capital Asset Pricing Model Ri = Rf + beta*(Rm - Rf)






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






26. Market risk - Liquidity risk - Credit risk - Operational risk






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






28. Need to assess risk and tell management so they can determine which risks to take on






29. Quantile of a statistical distribution






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






31. Multibeta CAPM Ri - Rf =






32. 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






33. Volatility of unexpected outcomes






34. 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






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






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






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






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






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






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






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






42. Hazard - Financial - Operational - Strategic






43. Concentrate on mid- region of probability distribution - Relevant to owners and proxies






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. Interest rate movements - derivatives - defaults






46. 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






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






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






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






50. Wrong distribution - Historical sample may not apply