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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. 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






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






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






4. Return is linearly related to growth rate in consumption






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






6. 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






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






8. 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.






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






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






11. Joseph Jett exploited an accounting glitch to book 350 million of false profits (government bonds) - Massive misreporting resulted in loss of confidence in management - Failed to take into account the present value of a forward - Learn to investigate






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






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






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






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






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






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






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






19. 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






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






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

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






24. Rp = XaRa + XbRb






25. Quantile of a statistical distribution






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






27. Strategic risk - Business risk - Reputational risk






28. 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






29. Interest rate movements - derivatives - defaults






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






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






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






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






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






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






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






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






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






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






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






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






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






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






44. Risks that are assumed willingly - to gain a competitive edge or add shareholder value






45. 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






46. 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 -






47. 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






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






49. 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






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