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






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






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






4. Make common factor beta - Build optimal portfolios - Judge valuation of securities - Track an index but enhance with stock selection






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






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






7. 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






8. 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






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






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






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






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






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






14. 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






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






16. 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.






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






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






19. Multibeta CAPM Ri - Rf =






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






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






22. 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






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






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






25. Wrong distribution - Historical sample may not apply






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






27. CAPM requires the strong form of the Efficient Market Hypothesis = private information






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






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






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






31. Potential amount that can be lost






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






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






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






35. 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






36. When negative taxable income is moved to a different year to offset future or past taxable income






37. Both probability and cost of tail events are considered






38. Asset-liability/market-liquidity risk






39. Human - created: business cycles - inflation - govt policy changes - wars - Natural: weather - quakes






40. Enterprise Risk Management - ERM is a discipline - culture of enterprise - ERM applies to all industries - ERM is not just defensive - adds value - ERM encompasses all risks - ERM addresses all stakeholders






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






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






43. Unanticipated movements in relative prices of assets in hedged position






44. Rp = XaRa + XbRb






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






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






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






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






49. Market risk - Liquidity risk - Credit risk - Operational risk






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