## Test your basic knowledge |

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

**2. 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**

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

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

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

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

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

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

**9. Concave function that extends from minimum variance portfolio to maximum return portfolio**

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

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

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

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

**14. The need to hedge against risks - for firms need to speculate.**

**15. 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**

**16. Wrong distribution - Historical sample may not apply**

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

**18. 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**

**19. Unanticipated movements in relative prices of assets in hedged position**

**20. Market risk - Liquidity risk - Credit risk - Operational risk**

**21. 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**

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

**23. Covariance = correlation coefficient std dev(a) std dev(b)**

**24. 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**

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

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

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

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

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

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

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

**32. Inability to make payment obligations (ex. Margin calls)**

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

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

**35. 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**

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

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

**38. 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**

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

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

**41. Quantile of a statistical distribution**

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

**43. Strategic risk - Business risk - Reputational risk**

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

**45. Multibeta CAPM Ri - Rf =**

**46. Asses firm risks - Communicate risks - Manage and monitor risks**

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

**48. Long in options = expecting volatility increase - Short in options = expecting volatility decrease**

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

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