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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. Quantile of an empirical distribution






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






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






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






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






6. Interest rate movements - derivatives - defaults






7. Changes in vol - implied or actual






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






9. 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






10. ex. Human capital - Equilibrium return can be higher or lower than it is under standard CAPM






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






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






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






14. 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






15. Hazard - Financial - Operational - Strategic






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






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






18. E(Ri) = Rf + beta[(E(Rm)- Rf)- (tax factor)(dividend yield for market - Rf)] + (tax factor)(dividend yield for stock - Rf)






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






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






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






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






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






24. Future price is greater than the spot price






25. 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






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






27. Both probability and cost of tail events are considered






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






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






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






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






32. 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






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






34. Quantile of a statistical distribution






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






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






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

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38. Asset-liability/market-liquidity risk






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






40. 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






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






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






43. 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






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






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






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






47. Multibeta CAPM Ri - Rf =






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






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






50. Wrong distribution - Historical sample may not apply