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Test your basic knowledge |
FRM: Foundations Of Risk Management
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business-skills
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frm
Instructions:
Answer 50 questions in 15 minutes.
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study here
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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. Difference between forward price and spot price - Should approach zero as the contract approaches maturity
Basis
Ten assumptions underlying CAPM
Sharpe measure
Firms becoming more sensitive to changes(bank deregulation)
2. Relationship drawn from CML - RAP = [(market std dev)/(portfolio std dev)]*(Portfolio return - risk free rate) + risk free rate - annualized
Allied Irish Bank
Drysdale Securities (Chase Manhattan)
Nonmarketable asset impact on CAPM
Risk- adjusted performance measure (RAP)
3. Occurs the day when two parties exchange payments same day
Business Risk
Roles of risk management
Settlement risk
VaR - Value at Risk
4. Firms became multinational - - >watched xchange rates more - deregulation and globalization
Capital market line (CML)
Operational risk
Firms becoming more sensitive to changes(bank deregulation)
Volatility Market risk
5. Capital structure (financial distress) - Taxes - Agency and information asymmetries
Practical considerations related to ERM implementatio
Market imperfections that can create value
Barings
Settlement risk
6. Asses firm risks - Communicate risks - Manage and monitor risks
Roles of risk management
Treynor measure
Carry- backs and carry- forwards
Shortcomings of risk metrics
7. The uses of debt to fall into a lower tax rate
Debt overhang
Uncertainty
Tax shield
Allied Irish Bank
8. Both probability and cost of tail events are considered
Correlation coefficient effect on diversification
Market risk
Tail VaR or TCE - Tail Conditional Expectation(TCE)
Credit event
9. Risk- adjusted rating (RAR) - Difference between relative returns and relative risk
Jensen's alpha
Morningstar Rating System
Liquidity risk
APT for passive portfolio management
10. (E(Rp) - MAR)/(sqrt((1/T)summation(Rpt- MAR)^2) - MAR - minimum acceptable return
VaR- based analysis (formula)
Security (primary vs secondary)
Sortino ratio
Exposure
11. Human - created: business cycles - inflation - govt policy changes - wars - Natural: weather - quakes
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
Treynor measure
Where is risk coming from
APT in active portfolio management
12. 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
RAR = relative return of portfolio (RRp)
Carry- backs and carry- forwards
Drysdale Securities (Chase Manhattan)
Nonmarketable asset impact on CAPM
13. Asset-liability/market-liquidity risk
Basic Market risk
Options motivation on volatility
Risk Management Irrelevance Proposition
Liquidity risk
14. Misleading reporting (incorrect market info) - Due to large market moves - Due to conduct of customer business
Three main reasons for financial disasters
Financial risks
Carry- backs and carry- forwards
Firms becoming more sensitive to changes(bank deregulation)
15. Long in options = expecting volatility increase - Short in options = expecting volatility decrease
Options motivation on volatility
Debt overhang
Allied Irish Bank
Ri = ai + bi1l1 + bi2l2....+ei
16. Concave function that extends from minimum variance portfolio to maximum return portfolio
Efficient frontier
Parametric VaR
Where is risk coming from
Drysdale Securities (Chase Manhattan)
17. Ri = Rz + (Rm - Rz)*beta - Rz = return on zero- beta portfolio
Financial risks
Zero- beta CAPM (two factor model)
What lead to the exponential growth to derivatives mkt?
VaR - Value at Risk
18. Make common factor beta - Build optimal portfolios - Judge valuation of securities - Track an index but enhance with stock selection
APT in active portfolio management
Where is risk coming from
Business risks
Sharpe measure
19. Returns on any stock are linearly related to a set of indexes
Effect of non- price- taking behavior on CAPM
Ri = ai + bi1l1 + bi2l2....+ei
CAPM assumption for EMH
Settlement risk
20. 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
Three main reasons for financial disasters
Performance- related metrics
Business Risk
CAPM (formula)
21. Excess return equated to alpha plus expected systematic return E(Rp) - Rf = alpha + beta(E(Rm) - Rf)
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22. Losses due to market activities ex. Interest rate changes or defaults
Financial risks
Operational risk
Risks excluded from operational risk
Ri = Rz + (gamma)(beta)
23. Std dev between portfolio return and benchmark return TE = std dev * (Rp- Rb) - Benchmark funds
Ten assumptions underlying CAPM
Options motivation on volatility
Shortfall risk
Tracking error
24. Return is linearly related to growth rate in consumption
Forms of Market risk
Business Risk
Risk types addressed by ERM
Multi- period version of CAPM
25. Future price is greater than the spot price
Ways firms can fail to account for risks
VaR - Value at Risk
Contango
Credit event
26. Xmvp = ((variance of b) - covariance)/((variance of a) + (variance of b) - 2 * covariance)
Market imperfections that can create value
Debt overhang
Solve for minimum variance portfolio
What lead to the exponential growth to derivatives mkt?
27. Unanticipated movements in relative prices of assets in hedged position
Basic Market risk
CAPM with taxes included (equation)
Models used in ERM framework
Tail VaR or TCE - Tail Conditional Expectation(TCE)
28. 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
Funding liquidity risk
Ri = Rz + (gamma)(beta)
APT for passive portfolio management
Ways firms can fail to account for risks
29. Market risk - Liquidity risk - Credit risk - Operational risk
Expected return of two assets
Nonmarketable asset impact on CAPM
Asset transformers
Four major types of risk
30. Absolute and relative risk - direction and non-directional
CAPM assumption for EMH
Forms of Market risk
Shortfall risk
APT (equation and assumptions)
31. Quantile of an empirical distribution
Nonparametric VaR
Probability of ruin
Expected return of two assets
Carry- backs and carry- forwards
32. The lower (closer to - 1) - the higher the payoff from diversification
Correlation coefficient effect on diversification
Valuation vs. Risk management
Formula for covariance
Options motivation on volatility
33. Interest rate movements - derivatives - defaults
Business Risk
Ten assumptions underlying CAPM
Settlement risk
Financial Risk
34. Too much debt - Causes shareholders to seek projects that create short term capital but long term losses
LTCM
Debt overhang
Risk- adjusted performance measure (RAP)
Forms of Market risk
35. Modeling approach is typically between statistical analytic models and structural simulation models
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
Efficient frontier
Models used in ERM framework
Derivative contract
36. Quantile of a statistical distribution
Business Risk
Parametric VaR
Shortfall risk
Zero- beta CAPM (two factor model)
37. 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
Carry- backs and carry- forwards
VaR - Value at Risk
Contango
Practical considerations related to ERM implementatio
38. Changes in vol - implied or actual
Importance of communication for risk managers
Multi- period version of CAPM
CAPM assumption for EMH
Volatility Market risk
39. Derives value from an underlying asset - rate - or index - Derives value from a security
Shortfall risk
Settlement risk
Derivative contract
Nonparametric VaR
40. Liquidity and maturity transformation - Brokers - Reduces transaction and information costs between households and corporations
Ri = ai + bi1l1 + bi2l2....+ei
Asset transformers
Contango
Funding liquidity risk
41. Risk of loses owing to movements in level or volatility of market prices
Ri = ai + bi1l1 + bi2l2....+ei
Asset transformers
Solve for minimum variance portfolio
Market risk
42. Multibeta CAPM Ri - Rf =
(market beta)(Rm - Rf) + (sensitivity to inflation risk)(price of inflation risk)
Ways firms can fail to account for risks
Sortino ratio
RAR = relative return of portfolio (RRp)
43. 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
Forms of Market risk
Parametric VaR
Debt overhang
Kidder Peabody
44. CAPM requires the strong form of the Efficient Market Hypothesis = private information
Security (primary vs secondary)
Effect of non- price- taking behavior on CAPM
CAPM assumption for EMH
Models used in ERM framework
45. The need to hedge against risks - for firms need to speculate.
Settlement risk
Risk
Models used in ERM framework
What lead to the exponential growth to derivatives mkt?
46. Inability to make payment obligations (ex. Margin calls)
Funding liquidity risk
Four major types of risk
Recovery rate
Contango
47. Percentile of the distribution corresponding to the point which capital is exhausted - Typically - a minimum acceptable probability of ruin is specified - and economic capital is derived from it
Sovereign risk
Expected return of two assets
Probability of ruin
Nonmarketable asset impact on CAPM
48. Risks that are assumed willingly - to gain a competitive edge or add shareholder value
Barings
Business risks
Allied Irish Bank
CAPM with taxes included (equation)
49. 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
Basis risk
Shortcomings of risk metrics
Solve for minimum variance portfolio
Asset transformers
50. When negative taxable income is moved to a different year to offset future or past taxable income
Volatility Market risk
Kidder Peabody
Carry- backs and carry- forwards
Derivative contract