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

2. CAPM requires the strong form of the Efficient Market Hypothesis = private information

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

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

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

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

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. 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. Changes in vol - implied or actual

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

11. Both probability and cost of tail events are considered

12. 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

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

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

15. Multibeta CAPM Ri - Rf =

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

17. 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

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

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

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

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

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

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

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

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

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