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






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






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






4. IR = (E(Rp) - E(Rb))/(std dev(Rp- Rb)) - Evaluate manager of a benchmark fund






5. Return is linearly related to growth rate in consumption






6. Misleading reporting (incorrect market info) - Due to large market moves - Due to conduct of customer business






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






8. 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






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






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






11. Quantile of a statistical distribution






12. 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






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






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






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






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






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






18. Potential amount that can be lost






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






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

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






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






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






24. 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






25. 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 -






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






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






28. 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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29. Law of one price - Homogeneous expectations - Security returns process






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






31. The lower (closer to - 1) - the higher the payoff from diversification






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






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






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






35. Both probability and cost of tail events are considered






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






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






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






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






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






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






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






43. 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






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






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






46. Volatility of unexpected outcomes






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






48. 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






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






50. Multibeta CAPM Ri - Rf =







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