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






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






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






4. Market risk - Liquidity risk - Credit risk - Operational risk






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






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






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

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8. 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






9. 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






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






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






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






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






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






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






16. Wrong distribution - Historical sample may not apply






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






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






19. 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






20. 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.






21. Joseph Jett exploited an accounting glitch to book 350 million of false profits (government bonds) - Massive misreporting resulted in loss of confidence in management - Failed to take into account the present value of a forward - Learn to investigate






22. The need to hedge against risks - for firms need to speculate.






23. Quantile of a statistical distribution






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






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






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






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






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






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






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






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






33. Hazard - Financial - Operational - Strategic






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






35. 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






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






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






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






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






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






41. 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






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






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






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






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






46. Potential amount that can be lost






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






48. Both probability and cost of tail events are considered






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






50. Strategic risk - Business risk - Reputational risk