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FRM: Foundations Of Risk Management
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FRM: Foundations Of Risk Management
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25 Questions

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

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

3. Quantile of an empirical distribution

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

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

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

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

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

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

10. Wrong distribution - Historical sample may not apply

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

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

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

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

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

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

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

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

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

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

21. Changes in vol - implied or actual

22. Rp = XaRa + XbRb

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

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

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

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