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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. Capital structure (financial distress) - Taxes - Agency and information asymmetries






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






3. Potential amount that can be lost






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






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






6. Asset-liability/market-liquidity risk






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






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






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






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






11. Market risk - Liquidity risk - Credit risk - Operational risk






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






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






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






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






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






17. 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






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






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






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

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21. 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






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






23. 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






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






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






26. Future price is greater than the spot price






27. 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






28. 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






29. Quantile of a statistical distribution






30. 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






31. Wrong distribution - Historical sample may not apply






32. Economic Cost of Ruin(ECOR) - Enhancement to probability of ruin where severity of ruin is reflected






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






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






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






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






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






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






39. 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






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






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






42. Simple form of CAPM - but market price of risk is lower than if all investors were price takers






43. 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






44. Quantile of an empirical distribution






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






46. 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






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






48. Interest rate movements - derivatives - defaults






49. Long Term Capital Management - Renowned quants produced great returns with arbitrage- type trades - Unexpected and extreme events resulted in devaluation of Russian Rouble - resulting in a 3.65 billion dollar bailout - Failure to account for illiquid






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