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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. Both probability and cost of tail events are considered






2. 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

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






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






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






6. Multibeta CAPM Ri - Rf =






7. Potential amount that can be lost






8. 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






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






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






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






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






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






14. When firm has so much debt that it leads to making investment decisions that benefit shareholdser but affect total firm value adversely






15. 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






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






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






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






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






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






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






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






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






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






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






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






28. 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






29. Inability to make payment obligations (ex. Margin calls)






30. 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






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






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






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






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






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






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






37. 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






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






39. Market risk - Liquidity risk - Credit risk - Operational risk






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






41. Volatility of unexpected outcomes






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






43. Return is linearly related to growth rate in consumption






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






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






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






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






48. Future price is greater than the spot price






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






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