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






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






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






4. 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


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






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






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






8. 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

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


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






10. 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






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






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






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






14. Asset-liability/market-liquidity risk






15. 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 -






16. Multibeta CAPM Ri - Rf =






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






18. 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






19. Interest rate movements - derivatives - defaults






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






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






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






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






24. Rp = XaRa + XbRb






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






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






27. Return is linearly related to growth rate in consumption






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






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






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






31. 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






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






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






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






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






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






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






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






39. 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






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






41. Changes in vol - implied or actual






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






43. Future price is greater than the spot price






44. 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.






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






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






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






48. 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






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






50. Volatility of unexpected outcomes