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. Asset-liability/market-liquidity risk
VaR - Value at Risk
LTCM
Liquidity risk
Business risks
2. Loss resulting from inadequate/failed internal processes - people or systems - back-office problems - settlement - etc - reconciliation
Liquidity risk
Shortfall risk
Operational risk
Information ratio
3. The lower (closer to - 1) - the higher the payoff from diversification
Valuation vs. Risk management
Nonmarketable asset impact on CAPM
APT for passive portfolio management
Correlation coefficient effect on diversification
4. Sqrt((Xa^2)(variance of a) + (1- Xa)^2(variance of b) + 2(Xa)(1- Xa)(covariance))
Market imperfections that can create value
Standard deviation of two assets
Firms becoming more sensitive to changes(bank deregulation)
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
5. Designate ERM champion - usually CRO - Make ERM part of firm culture - Determining all possible risks - Quantifying operational and strategic risks - Integrating risks (dependencies) - Lack of risk transfer mechanisms - Monitoring
Practical considerations related to ERM implementatio
Firms becoming more sensitive to changes(bank deregulation)
Liquidity risk
Risk Management Irrelevance Proposition
6. People risk = fraud - etc. - Model risk = flawed valuation models - Legal risk = exposure to fines and lawsuits
Business risks
3 main types of operational risk
Risk
Differences in financial risk management for financial companies vs industrial companies
7. IR = (E(Rp) - E(Rb))/(std dev(Rp- Rb)) - Evaluate manager of a benchmark fund
Information ratio
Treynor measure
Solvency-related metrics
Capital market line (CML)
8. 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
9. 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
Tracking error
Standard deviation of two assets
Risk- adjusted performance measure (RAP)
Valuation vs. Risk management
10. Volatility of expected outcomes - Outcomes are random but distribution is known or approximated
Valuation vs. Risk management
Effect of heterogeneous expectations on CAPM
Risk
Traits of ERM
11. Gamma = market price of the consumption beta - Beta = E(r) of zero consumption beta
Risk Management Irrelevance Proposition
Ri = Rz + (gamma)(beta)
Shortfall risk
Morningstar Rating System
12. Derives value from an underlying asset - rate - or index - Derives value from a security
Exposure
Liquidity risk
Models used in ERM framework
Derivative contract
13. Cannot exit position in market due to size of the position
Effect of heterogeneous expectations on CAPM
Multi- period version of CAPM
Asset liquidity risk
Firms becoming more sensitive to changes(bank deregulation)
14. 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
Funding liquidity risk
Exposure
Business Risk
VaR- based analysis (formula)
15. Risk replaced with VaR (Portfolio return - risk free rate)/(portfolio VaR/initial value of portfolio)
Solve for minimum variance portfolio
Kidder Peabody
Basic Market risk
VaR- based analysis (formula)
16. Focus on adverse tail of distribution - Relevant for determining economic capital (EC) requirements
Solvency-related metrics
Settlement risk
Debt overhang
Zero- beta CAPM (two factor model)
17. Relative portfolio risk (RRiskp) - Based on a one- month investment period
Ri = Rz + (gamma)(beta)
VaR- based analysis (formula)
Risk types addressed by ERM
RAR = relative return of portfolio (RRp)
18. Credit risk that occurs when there is a change in the counterparty's ability to perform its obligations
Models used in ERM framework
APT in active portfolio management
Credit event
Firms becoming more sensitive to changes(bank deregulation)
19. Unanticipated movements in relative prices of assets in hedged position
Basic Market risk
Efficient frontier
Prices of risk vs sensitivity
Risk
20. Capital structure (financial distress) - Taxes - Agency and information asymmetries
Market imperfections that can create value
Effect of non- price- taking behavior on CAPM
Roles of risk management
Performance- related metrics
21. Interest rate movements - derivatives - defaults
Roles of risk management
Financial Risk
Source of need for risk management
Kidder Peabody
22. Volatility of unexpected outcomes
Risk- adjusted performance measure (RAP)
What lead to the exponential growth to derivatives mkt?
Risk
Tail VaR or TCE - Tail Conditional Expectation(TCE)
23. Risk of loses owing to movements in level or volatility of market prices
Expected return of two assets
Market risk
Risk Management Irrelevance Proposition
CAPM with taxes included (equation)
24. 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
Risk
Ten assumptions underlying CAPM
APT (equation and assumptions)
Efficient frontier
25. Probability distribution is unknown (ex. A terrorist attack)
Zero- beta CAPM (two factor model)
Tracking error
Uncertainty
Nonparametric VaR
26. 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
Standard deviation of two assets
Effect of non- price- taking behavior on CAPM
Kidder Peabody
Ways firms can fail to account for risks
27. 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
Expected return of two assets
Practical considerations related to ERM implementatio
Financial risks
Allied Irish Bank
28. Firms became multinational - - >watched xchange rates more - deregulation and globalization
Nonmarketable asset impact on CAPM
Information ratio
Firms becoming more sensitive to changes(bank deregulation)
Ri = Rz + (gamma)(beta)
29. Xmvp = ((variance of b) - covariance)/((variance of a) + (variance of b) - 2 * covariance)
APT in active portfolio management
Solve for minimum variance portfolio
APT (equation and assumptions)
APT for passive portfolio management
30. Inability to make payment obligations (ex. Margin calls)
Solvency-related metrics
Market risk
Ten assumptions underlying CAPM
Funding liquidity risk
31. Risk- adjusted rating (RAR) - Difference between relative returns and relative risk
Morningstar Rating System
Carry- backs and carry- forwards
Risk- adjusted performance measure (RAP)
RAR = relative return of portfolio (RRp)
32. When firm has so much debt that it leads to making investment decisions that benefit shareholdser but affect total firm value adversely
Options motivation on volatility
Debt overhang
Information ratio
Effect of heterogeneous expectations on CAPM
33. Excess return equated to alpha plus expected systematic return E(Rp) - Rf = alpha + beta(E(Rm) - Rf)
Warning
: Invalid argument supplied for foreach() in
/var/www/html/basicversity.com/show_quiz.php
on line
183
34. Excess return divided by portfolio beta Tp = (E(Rp) - Rf)/portfolio beta - Better for well diversified portfolios
Tail VaR or TCE - Tail Conditional Expectation(TCE)
Risk
Settlement risk
Treynor measure
35. Modeling approach is typically between statistical analytic models and structural simulation models
Capital market line (CML)
Solvency-related metrics
Models used in ERM framework
Allied Irish Bank
36. The uses of debt to fall into a lower tax rate
Tax shield
Risks excluded from operational risk
Allied Irish Bank
Settlement risk
37. Future price is greater than the spot price
Contango
Parametric VaR
Asset transformers
Forms of Market risk
38. 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
Drysdale Securities (Chase Manhattan)
Forms of Market risk
Shortfall risk
Ri = ai + bi1l1 + bi2l2....+ei
39. Quantile of an empirical distribution
Financial Risk
Sovereign risk
Basis risk
Nonparametric VaR
40. Returns on any stock are linearly related to a set of indexes
RAR = relative return of portfolio (RRp)
VaR - Value at Risk
Ri = ai + bi1l1 + bi2l2....+ei
Performance- related metrics
41. Market risk - Liquidity risk - Credit risk - Operational risk
Uncertainty
APT (equation and assumptions)
Four major types of risk
Forms of Market risk
42. Security is a financial claim issued to raise capital - Primary securities are backed by real assets - Secondary securities are backed by primary securities
Security (primary vs secondary)
Three main reasons for financial disasters
APT for passive portfolio management
Tail VaR or TCE - Tail Conditional Expectation(TCE)
43. 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
Jensen's alpha
Barings
Solve for minimum variance portfolio
Debt overhang
44. Ri = Rz + (Rm - Rz)*beta - Rz = return on zero- beta portfolio
Barings
Debt overhang
Zero- beta CAPM (two factor model)
Risk
45. Strategic risk - Business risk - Reputational risk
Risks excluded from operational risk
Uncertainty
Zero- beta CAPM (two factor model)
Multi- period version of CAPM
46. ex. Human capital - Equilibrium return can be higher or lower than it is under standard CAPM
Standard deviation of two assets
Nonmarketable asset impact on CAPM
3 main types of operational risk
Where is risk coming from
47. Wrong distribution - Historical sample may not apply
Ways risk can be mismeasured
Exposure
Ten assumptions underlying CAPM
Debt overhang
48. Relationship drawn from CML - RAP = [(market std dev)/(portfolio std dev)]*(Portfolio return - risk free rate) + risk free rate - annualized
Importance of communication for risk managers
Expected return of two assets
Effect of non- price- taking behavior on CAPM
Risk- adjusted performance measure (RAP)
49. CAPM requires the strong form of the Efficient Market Hypothesis = private information
CAPM assumption for EMH
Market risk
Ten assumptions underlying CAPM
Multi- period version of CAPM
50. Managing risks is a core activity at financial companies - Industrial companies hedge financial risks
Asset transformers
Contango
Information ratio
Differences in financial risk management for financial companies vs industrial companies