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. IR = (E(Rp) - E(Rb))/(std dev(Rp- Rb)) - Evaluate manager of a benchmark fund
Uncertainty
Information ratio
Standard deviation of two assets
Security (primary vs secondary)
2. Relative portfolio risk (RRiskp) - Based on a one- month investment period
RAR = relative return of portfolio (RRp)
Asset liquidity risk
Business risks
Sovereign risk
3. Future price is greater than the spot price
Contango
Efficient frontier
Standard deviation of two assets
Parametric VaR
4. Expected value of unfavorable deviations of a random variable from a specified target level
Business risks
BTR - Below Target Risk
Tail VaR or TCE - Tail Conditional Expectation(TCE)
Performance- related metrics
5. 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 -
Source of need for risk management
Financial risks
Business Risk
Funding liquidity risk
6. Rp = XaRa + XbRb
Expected return of two assets
Nonparametric VaR
Treynor measure
Ri = Rz + (gamma)(beta)
7. Law of one price - Homogeneous expectations - Security returns process
Treynor measure
APT (equation and assumptions)
Differences in financial risk management for financial companies vs industrial companies
Risks excluded from operational risk
8. Xmvp = ((variance of b) - covariance)/((variance of a) + (variance of b) - 2 * covariance)
Settlement risk
Shortfall risk
Funding liquidity risk
Solve for minimum variance portfolio
9. Changes in vol - implied or actual
Correlation coefficient effect on diversification
Capital market line (CML)
Volatility Market risk
Uncertainty
10. Gamma = market price of the consumption beta - Beta = E(r) of zero consumption beta
Treynor measure
Security (primary vs secondary)
Ri = Rz + (gamma)(beta)
Barings
11. Risk replaced with VaR (Portfolio return - risk free rate)/(portfolio VaR/initial value of portfolio)
Settlement risk
VaR- based analysis (formula)
Three main reasons for financial disasters
Information ratio
12. Ri = Rz + (Rm - Rz)*beta - Rz = return on zero- beta portfolio
APT for passive portfolio management
APT in active portfolio management
Zero- beta CAPM (two factor model)
Importance of communication for risk managers
13. Capital Asset Pricing Model Ri = Rf + beta*(Rm - Rf)
CAPM (formula)
Formula for covariance
Nonparametric VaR
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
14. The lower (closer to - 1) - the higher the payoff from diversification
Asset liquidity risk
Correlation coefficient effect on diversification
Credit event
Tail VaR or TCE - Tail Conditional Expectation(TCE)
15. Absolute and relative risk - direction and non-directional
Financial Risk
Exposure
What lead to the exponential growth to derivatives mkt?
Forms of Market risk
16. 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
Probability of ruin
Shortcomings of risk metrics
Carry- backs and carry- forwards
Ri = Rz + (gamma)(beta)
17. 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
Warning
: Invalid argument supplied for foreach() in
/var/www/html/basicversity.com/show_quiz.php
on line
183
18. The need to hedge against risks - for firms need to speculate.
What lead to the exponential growth to derivatives mkt?
Sortino ratio
Correlation coefficient effect on diversification
Business risks
19. Managing risks is a core activity at financial companies - Industrial companies hedge financial risks
Differences in financial risk management for financial companies vs industrial companies
Risk Management Irrelevance Proposition
Treynor measure
Exposure
20. Concentrate on mid- region of probability distribution - Relevant to owners and proxies
Risks excluded from operational risk
Performance- related metrics
Basis
Risk
21. Simple form of CAPM - but market price of risk is lower than if all investors were price takers
Multi- period version of CAPM
Effect of non- price- taking behavior on CAPM
Sovereign risk
Tax shield
22. Prices of risk are common factors and do not change - Sensitivities can change
Asset liquidity risk
Prices of risk vs sensitivity
Formula for covariance
Risk
23. The uses of debt to fall into a lower tax rate
Information ratio
Tax shield
Parametric VaR
Asset liquidity risk
24. Losses due to market activities ex. Interest rate changes or defaults
Financial risks
Valuation vs. Risk management
APT for passive portfolio management
Importance of communication for risk managers
25. Too much debt - Causes shareholders to seek projects that create short term capital but long term losses
Where is risk coming from
Volatility Market risk
Debt overhang
Treynor measure
26. Returns on any stock are linearly related to a set of indexes
CAPM (formula)
Ri = ai + bi1l1 + bi2l2....+ei
CAPM with taxes included (equation)
Exposure
27. Excess return divided by portfolio volatility (std dev) Sp = (E(Rp) - Rf)/(std dev of Rp) - Better for non- diversified portfolios
Sharpe measure
Risk- adjusted performance measure (RAP)
EPD or ECOR - Expected Policyholder Deficit (EPD)
Ways firms can fail to account for risks
28. Hazard - Financial - Operational - Strategic
CAPM assumption for EMH
Solve for minimum variance portfolio
Security (primary vs secondary)
Risk types addressed by ERM
29. 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
Practical considerations related to ERM implementatio
Barings
Exposure
Liquidity risk
30. Probability distribution is unknown (ex. A terrorist attack)
Ri = Rz + (gamma)(beta)
Options motivation on volatility
Uncertainty
Parametric VaR
31. 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
Funding liquidity risk
Allied Irish Bank
Firms becoming more sensitive to changes(bank deregulation)
Shortcomings of risk metrics
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
Derivative contract
Allied Irish Bank
Market risk
Risk
33. Need to assess risk and tell management so they can determine which risks to take on
Tracking error
Multi- period version of CAPM
Financial Risk
Importance of communication for risk managers
34. 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
LTCM
Basis risk
APT for passive portfolio management
Three main reasons for financial disasters
35. Loss resulting from inadequate/failed internal processes - people or systems - back-office problems - settlement - etc - reconciliation
Ways risk can be mismeasured
Zero- beta CAPM (two factor model)
Operational risk
Formula for covariance
36. Long in options = expecting volatility increase - Short in options = expecting volatility decrease
Options motivation on volatility
Tail VaR or TCE - Tail Conditional Expectation(TCE)
Prices of risk vs sensitivity
Four major types of risk
37. Derives value from an underlying asset - rate - or index - Derives value from a security
Effect of non- price- taking behavior on CAPM
Jensen's alpha
Derivative contract
Parametric VaR
38. E(Ri) = Rf + beta[(E(Rm)- Rf)- (tax factor)(dividend yield for market - Rf)] + (tax factor)(dividend yield for stock - Rf)
Ten assumptions underlying CAPM
Treynor measure
CAPM with taxes included (equation)
Risk
39. Unanticipated movements in relative prices of assets in a hedged position - All hedges imply some basis risk
Zero- beta CAPM (two factor model)
Options motivation on volatility
Basis risk
Security (primary vs secondary)
40. Firms became multinational - - >watched xchange rates more - deregulation and globalization
Ten assumptions underlying CAPM
Shortfall risk
Firms becoming more sensitive to changes(bank deregulation)
Models used in ERM framework
41. (E(Rp) - MAR)/(sqrt((1/T)summation(Rpt- MAR)^2) - MAR - minimum acceptable return
Risk Management Irrelevance Proposition
Risks excluded from operational risk
Sortino ratio
Tail VaR or TCE - Tail Conditional Expectation(TCE)
42. When two payments are exchanged the same day and one party may default after payment is made
Four major types of risk
Risk
Risk
Settlement risk
43. Strategic risk - Business risk - Reputational risk
Risks excluded from operational risk
VaR- based analysis (formula)
APT for passive portfolio management
Ten assumptions underlying CAPM
44. Multibeta CAPM Ri - Rf =
APT for passive portfolio management
Ri = ai + bi1l1 + bi2l2....+ei
APT (equation and assumptions)
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
45. Covariance = correlation coefficient std dev(a) std dev(b)
Formula for covariance
APT for passive portfolio management
Financial Risk
Uncertainty
46. Quantile of a statistical distribution
Sortino ratio
Asset transformers
Parametric VaR
Risk- adjusted performance measure (RAP)
47. When negative taxable income is moved to a different year to offset future or past taxable income
Probability of ruin
Carry- backs and carry- forwards
Sharpe measure
Settlement risk
48. Potential amount that can be lost
Shortcomings of risk metrics
Asset liquidity risk
Exposure
CAPM assumption for EMH
49. 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
LTCM
Formula for covariance
Risk
Three main reasons for financial disasters
50. Return is linearly related to growth rate in consumption
Multi- period version of CAPM
Settlement risk
Derivative contract
Asset transformers