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






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






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






4. Hazard - Financial - Operational - Strategic






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






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






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






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






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






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






11. 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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12. The need to hedge against risks - for firms need to speculate.






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






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






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






16. Interest rate movements - derivatives - defaults






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






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






19. Leeson took large speculative position in Nikkei 225 disguised as safe transactions by fake customers - Earthquake increased volatility and destroyed short put options - Losses of 1.25 billion and forced bankruptcy - Necessity of an independent tradi






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






21. 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






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






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

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24. Potential amount that can be lost






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






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






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






28. 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






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






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






31. Quantile of an empirical distribution






32. Asset-liability/market-liquidity risk






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






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






35. 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.






36. 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






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






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






39. Return is linearly related to growth rate in consumption






40. Volatility of unexpected outcomes






41. 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






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






43. Future price is greater than the spot price






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






45. Quantile of a statistical distribution






46. Xmvp = ((variance of b) - covariance)/((variance of a) + (variance of b) - 2 * covariance)






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






48. Wrong distribution - Historical sample may not apply






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






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







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