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






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






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






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






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






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






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






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






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






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






11. 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






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






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






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






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






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






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






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






19. Interest rate movements - derivatives - defaults






20. Hazard - Financial - Operational - Strategic






21. 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






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






23. Asses firm risks - Communicate risks - Manage and monitor risks






24. Quantile of a statistical distribution






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






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






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






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






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






31. Modeling approach is typically between statistical analytic models and structural simulation models






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






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






34. 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






35. Both probability and cost of tail events are considered






36. 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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37. 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






38. Changes in vol - implied or actual






39. 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






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






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






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






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






44. 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.






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






46. Potential amount that can be lost






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






48. 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






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






50. Return is linearly related to growth rate in consumption