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






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






3. Interest rate movements - derivatives - defaults






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






5. Changes in vol - implied or actual






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






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






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






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






10. Market risk - Liquidity risk - Credit risk - Operational risk






11. Asset-liability/market-liquidity risk






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






13. 1971: Fixed Exchange rate system broke down and was replaced by more volatile floating rate - 1973: Oil price shocks - - >high inflation - - >interest rate swings - 1987: Black Monday - OCt 19 - mkt fell 23% - 1989: Japanese stock price bubble -






14. 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






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






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






17. Potential amount that can be lost






18. 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






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






20. Volatility of expected outcomes - Outcomes are random but distribution is known or approximated






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






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






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






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






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






26. 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






27. Quantile of an empirical distribution






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






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






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






31. Multibeta CAPM Ri - Rf =






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






33. Volatility of unexpected outcomes






34. Credit risk that occurs when there is a change in the counterparty's ability to perform its obligations






35. Hazard - Financial - Operational - Strategic






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

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






38. 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






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






40. 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.






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






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






43. Quantile of a statistical distribution






44. 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






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






46. Proportion of loss that is recovered - Also referred to as "cents on the dollar"






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






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






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






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