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






2. 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






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






4. 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






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






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






7. 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






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






9. 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






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






11. 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.






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






13. Market risk - Liquidity risk - Credit risk - Operational risk






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






15. Volatility of unexpected outcomes






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






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






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






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






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






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

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






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






24. 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






25. Asset-liability/market-liquidity risk






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






27. 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






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






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






30. 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






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






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






33. 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 -






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






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






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






37. Asses firm risks - Communicate risks - Manage and monitor risks






38. Hazard - Financial - Operational - Strategic






39. Future price is greater than the spot price






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






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






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






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






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






45. Risks that are assumed willingly - to gain a competitive edge or add shareholder value






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






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






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






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






50. Both probability and cost of tail events are considered