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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. Future price is greater than the spot price






2. Asset-liability/market-liquidity risk






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






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






5. Quantile of an empirical distribution






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






7. Losses due to market activities ex. Interest rate changes or defaults






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






9. Liquidity and maturity transformation - Brokers - Reduces transaction and information costs between households and corporations






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






11. Changes in vol - implied or actual






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






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






14. Gamma = market price of the consumption beta - Beta = E(r) of zero consumption beta






15. Wrong distribution - Historical sample may not apply






16. Multibeta CAPM Ri - Rf =






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






18. Market risk - Liquidity risk - Credit risk - Operational risk






19. Interest rate movements - derivatives - defaults






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






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






22. 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






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






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


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






26. Potential amount that can be lost






27. Curve must be concave - Straight line connecting any two points must be under the curve






28. 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






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






30. 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






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






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






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






34. Hazard - Financial - Operational - Strategic






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






36. Proportion of loss that is recovered - Also referred to as "cents on the dollar"






37. Volatility of unexpected outcomes






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






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






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






41. 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






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






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






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






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






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






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






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






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






50. 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