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






2. Cannot exit position in market due to size of the position






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






4. Future price is greater than the spot price






5. Market risk - Liquidity risk - Credit risk - Operational risk






6. 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






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






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






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






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






11. 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






12. 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.






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






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






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






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






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






18. ex. Human capital - Equilibrium return can be higher or lower than it is under standard CAPM






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






20. Potential amount that can be lost






21. Changes in vol - implied or actual






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






23. 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


24. Multibeta CAPM Ri - Rf =






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






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






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






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






29. 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






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. Rp = XaRa + XbRb






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






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






34. Interest rate movements - derivatives - defaults






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






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






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






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


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






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






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






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






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






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






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






46. Quantile of a statistical distribution






47. Unanticipated movements in relative prices of assets in a hedged position - All hedges imply some basis risk






48. Std dev between portfolio return and benchmark return TE = std dev * (Rp- Rb) - Benchmark funds






49. Covariance = correlation coefficient std dev(a) std dev(b)






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