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






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






3. 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






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






5. 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






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






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






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






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






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






11. 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 -






12. Quantile of a statistical distribution






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






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

Warning: Invalid argument supplied for foreach() in /var/www/html/basicversity.com/show_quiz.php on line 183


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






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






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






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






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






21. Interest rate movements - derivatives - defaults






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






23. Future price is greater than the spot price






24. Both probability and cost of tail events are considered






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






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






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






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






29. Market risk - Liquidity risk - Credit risk - Operational risk






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






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






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






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






34. Quantile of an empirical distribution






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






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






37. Strategic risk - Business risk - Reputational risk






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






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






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






41. 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






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






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






44. 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






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






46. Wrong distribution - Historical sample may not apply






47. May not scale over time- Historical data may be meaningless - Not designed to account for catastrophes - VaR says nothing about losses in excess of VaR - May not handle sudden illiquidity






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






49. Rp = XaRa + XbRb






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