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FRM Exam Part 1 Full Access
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Question 1 of 30
1. Question
There are numerous best practices in corporate governance, which of the following are part of the best practices should be done by the board of directors?
I. Board is comprised of a majority of independent members with basic knowledge of the firm’s business and industry.
II. Board should consider the introduction of a chief risk officer.
III. Board maintains its independence from management
IV. Board is not responsible with any agency risks.Correct
There are numerous best practices in corporate governance, including:
– Board is comprised o f a majority of independent members with basic knowledge of the firm’s business and industry.
– Board watches out for the interests of all stakeholders, including shareholders and debtholders who may have somewhat differing interests.
– Board is aware of any agency risks and takes steps to reduce them (e.g., compensation committee).
– Board maintains its independence from management (e.g., CEO is not the chairman of the board).
– Board should consider the introduction o f a chief risk officer.Incorrect
There are numerous best practices in corporate governance, including:
– Board is comprised o f a majority of independent members with basic knowledge of the firm’s business and industry.
– Board watches out for the interests of all stakeholders, including shareholders and debtholders who may have somewhat differing interests.
– Board is aware of any agency risks and takes steps to reduce them (e.g., compensation committee).
– Board maintains its independence from management (e.g., CEO is not the chairman of the board).
– Board should consider the introduction o f a chief risk officer. -
Question 2 of 30
2. Question
Which of the following statements about best practices in corporate governance and risk management is most accurate?
Correct
The risk committee should be separate from the audit committee given the different knowledge base and skills required in each area.
Incorrect
The risk committee should be separate from the audit committee given the different knowledge base and skills required in each area.
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Question 3 of 30
3. Question
There are numerous best practices in risk management, these practices includes:
I. Board should approve all business contract regardless their background
II. Board should have a risk committee in place
III. Board should set up an ethics committee to uphold high ethical standards within the firm
IV. Board should approve all major transactionsCorrect
There are numerous best practices in risk management, including:
– Board should focus on the firm’s economic performance over accounting performance.
– Board should promote a robust risk management process within the firm (e.g., upward mobility for risk management careers).
– Board should set up an ethics committee to uphold high ethical standards within the firm.
– Board should ensure that compensation is based on risk-adjusted performance.
– Board should approve all major transactions.
– Board should always apply professional scepticism to ask probing and relevant questions to management.
– Board should have a risk committee in place.
Incorrect
There are numerous best practices in risk management, including:
– Board should focus on the firm’s economic performance over accounting performance.
– Board should promote a robust risk management process within the firm (e.g., upward mobility for risk management careers).
– Board should set up an ethics committee to uphold high ethical standards within the firm.
– Board should ensure that compensation is based on risk-adjusted performance.
– Board should approve all major transactions.
– Board should always apply professional scepticism to ask probing and relevant questions to management.
– Board should have a risk committee in place.
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Question 4 of 30
4. Question
What should the board ensure in order to promote a robust risk management process within the firm?
I. Ensure enough upward mobility in terms of risk management careers
II. Ensure the personality and the purpose of business partners
III. Ensure appropriate staff remuneration
IV. Ensure logical reporting relationships.Correct
To promote a robust risk management process within the firm, the board should ensure sufficient upward mobility in terms of risk management careers, appropriate staff remuneration, and logical reporting relationships.
Incorrect
To promote a robust risk management process within the firm, the board should ensure sufficient upward mobility in terms of risk management careers, appropriate staff remuneration, and logical reporting relationships.
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Question 5 of 30
5. Question
The board has some important responsibilities that could be facilitated with the involvement of a risk advisory director. What review and analysis should be included in the role of the board of directors in governance?
I. The firm’s risk management policies
II. The firm’s periodic risk management reports
III. The firm’s internal control
IV. The firm’s external control
Correct
More specific duties of the director (and the board in general) would include the review and analysis of the following:
– The firm’s risk management policies.
– The firm’s periodic risk management reports.
– The firm’s risk appetite and its impact on business strategy.
– The firm’s internal controls.
– The firm’s financial statements and disclosures.
– The firm’s related parties and related party transactions.
– Any audit reports from internal or external audits.
– Corporate governance best practices for the industry.
– Risk management practices of competitors and the industry.
Incorrect
More specific duties of the director (and the board in general) would include the review and analysis of the following:
– The firm’s risk management policies.
– The firm’s periodic risk management reports.
– The firm’s risk appetite and its impact on business strategy.
– The firm’s internal controls.
– The firm’s financial statements and disclosures.
– The firm’s related parties and related party transactions.
– Any audit reports from internal or external audits.
– Corporate governance best practices for the industry.
– Risk management practices of competitors and the industry.
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Question 6 of 30
6. Question
Using a bank as an example, the risk management committee (within the board) is responsible for identifying, measuring, and monitoring financial risks (i.e., credit, market, liquidity). What is the risk management committee responsible for?
I. Approving credit facilities that are above certain limits or within limits but above a specific threshold.
II. Committee monitors the composition of the bank’s lending and investment portfolios in light of the current economic environment in terms of credit, market, and liquidity risk to determine if any changes in the portfolio composition are required.
III. Maintains an offline communication with the external audit, internal audit, and management teams.
IV. Maintains an open line of communication with the external audit, internal audit, and management teams.
Correct
Using a bank as an example, the risk management committee (within the board) is responsible for identifying, measuring, and monitoring financial risks (i.e., credit, market, liquidity). The committee is responsible for approving credit facilities that are above certain limits or within limits but above a specific threshold. In addition, the committee monitors the composition of the bank’s lending and investment portfolios in light of the current economic environment in terms of credit, market, and liquidity risk to determine if any changes in the portfolio composition are required. The risk management committee usually maintains an open line of communication with the external audit, internal audit, and management teams.
Incorrect
Using a bank as an example, the risk management committee (within the board) is responsible for identifying, measuring, and monitoring financial risks (i.e., credit, market, liquidity). The committee is responsible for approving credit facilities that are above certain limits or within limits but above a specific threshold. In addition, the committee monitors the composition of the bank’s lending and investment portfolios in light of the current economic environment in terms of credit, market, and liquidity risk to determine if any changes in the portfolio composition are required. The risk management committee usually maintains an open line of communication with the external audit, internal audit, and management teams.
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Question 7 of 30
7. Question
The compensation committee is independent of management. What is the role of a compensation committee? Which of the description best describe the role of a compensation committee?
Correct
The compensation committee is independent of management. Its role is to discuss and approve the remuneration of key management personnel.
Incorrect
The compensation committee is independent of management. Its role is to discuss and approve the remuneration of key management personnel.
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Question 8 of 30
8. Question
Which committee is responsible for the reasonable accuracy of the firm’s financial statements and its regulatory reporting requirements? It must ensure that the firm has taken all steps to avoid the risk that the financial statements are materially misstated as a result of undiscovered errors and/or fraud.
Correct
The audit committee is responsible for the reasonable accuracy of the firm’s financial statements and its regulatory reporting requirements.
Incorrect
The audit committee is responsible for the reasonable accuracy of the firm’s financial statements and its regulatory reporting requirements.
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Question 9 of 30
9. Question
What should the audit committee monitors do to ensure more visible verification duties during the underlying systems in place?
I. Financial reporting
II. Regulatory compliance
III. Internal controls
IV. Risk management
Correct
In addition to the more visible verification duties, the audit committee monitors the underlying systems in place regarding financial reporting, regulatory compliance, internal controls, and risk management.
Incorrect
In addition to the more visible verification duties, the audit committee monitors the underlying systems in place regarding financial reporting, regulatory compliance, internal controls, and risk management.
-
Question 10 of 30
10. Question
What should a firm rely on to ensure that a firm’s risk management plan aligns risk appetite with business decisions?
Correct
To make sure that a firm’s risk management plan aligns risk appetite with business
decisions, the firm should rely on its risk infrastructure while taking into account incentive compensation plans.Incorrect
To make sure that a firm’s risk management plan aligns risk appetite with business
decisions, the firm should rely on its risk infrastructure while taking into account incentive compensation plans. -
Question 11 of 30
11. Question
Using an investment bank as an example, areas such as valuations, the profit and loss statement, and risk policy require input from which of the following units?
I. Risk management
II. Junior management
III. Senior management
IV. Traditional management
Correct
Using an investment bank as an example, areas such as valuations, the profit and loss statement, and risk policy require input from more than one of the following units: (1) senior management, (2) risk management, (3) trading room management, (4) operations, and (5) finance.
Incorrect
Using an investment bank as an example, areas such as valuations, the profit and loss statement, and risk policy require input from more than one of the following units: (1) senior management, (2) risk management, (3) trading room management, (4) operations, and (5) finance.
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Question 12 of 30
12. Question
Which of the following statements regarding the firm’s risk appetite and/or its business strategy is most accurate?
Correct
The board needs to develop/approve the firm’s risk appetite as well as assist management in developing the firm’s overall strategic plan.
Incorrect
The board needs to develop/approve the firm’s risk appetite as well as assist management in developing the firm’s overall strategic plan.
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Question 13 of 30
13. Question
The various responsibilities surrounding the profit and loss (P&L) statement illustrate the importance of understanding the interdependence of managing risk within a firm. Within an investment bank, which functional unit is most likely to provide final approval of the P&L?
Correct
Trading room management is responsible for signing off on the official P&L. Choice A is not correct because the finance unit ensures the integrity of the P&L. Choice B is not correct because the operations unit prepares and decomposes the daily P&L. Choice C is not correct because senior management does not have any responsibilities for the P&L from a risk management perspective.
Incorrect
Trading room management is responsible for signing off on the official P&L. Choice A is not correct because the finance unit ensures the integrity of the P&L. Choice B is not correct because the operations unit prepares and decomposes the daily P&L. Choice C is not correct because senior management does not have any responsibilities for the P&L from a risk management perspective.
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Question 14 of 30
14. Question
Which of the following statements regarding the role of the firm’s audit committee is most accurate?
Correct
The audit committee consists primarily of non-management members but there may be some management members (e.g., chief financial officer).
Incorrect
The audit committee consists primarily of non-management members but there may be some management members (e.g., chief financial officer).
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Question 15 of 30
15. Question
Companies face different type of risk arising from company operations, including but not limited to which of the following?
I. Credit
II. Market
III. Operational
IV. Information technology risk
Correct
Companies face a variety of risks that arise from company operations, including but not limited to: credit, market, liquidity, operational, business, and information technology (IT) risks.
Incorrect
Companies face a variety of risks that arise from company operations, including but not limited to: credit, market, liquidity, operational, business, and information technology (IT) risks.
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Question 16 of 30
16. Question
“ERM is a process, effected by an entity’s board of directors, management, and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its appetite, to provide reasonable assurance regarding the achievement of entity objectives. ”
Which of the following description best describe ERM (Enterprise Risk Management)?
Correct
ERM is often defined as a process or activity to manage risks.
Incorrect
ERM is often defined as a process or activity to manage risks.
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Question 17 of 30
17. Question
Which of the following are the three primary motivations for a firm to implement an ERM (Enterprise Risk Management) initiative?
I. Intergration of risk organization
II. Integration of risk transfer
III. Intergration of business processes
IV. Intergration of business risks
Correct
There are three primary motivations for a firm to implement an ERM initiative:
(1) integration of risk organization, (2) integration of risk transfer, and (3) integration of business processes.Incorrect
There are three primary motivations for a firm to implement an ERM initiative:
(1) integration of risk organization, (2) integration of risk transfer, and (3) integration of business processes. -
Question 18 of 30
18. Question
Which of the following can be optimized by ERM business performance through business decisions?
I. Capital allocation
II. Product development and pricing
III. Efficient allocation of resources
IV. Business decision through board of directors
Correct
ERM can optimize business performance through business decisions, including capital allocation, product development and pricing, and efficient allocation of resources.
Incorrect
ERM can optimize business performance through business decisions, including capital allocation, product development and pricing, and efficient allocation of resources.
-
Question 19 of 30
19. Question
The role now represents the culmination of the risk executive functions with escalating salaries, and a company’s CRO is often a contender for the highest executive roles including the role of the CEO. Which of the following are the ideas of CRO possess five critical skills?
I. Power of persuasion
II. Ability to protect the firm’s assets
III. Technical skills to understand all risks
IV. Consulting skills to educate the board and business functions on risk management
Correct
An ideal CRO possesses five critical skills: (1) leadership, (2) power of persuasion, (3) ability to protect the firm’s assets, (4) technical skills to understand all risks, and (3) consulting skills to educate the board and business functions on risk management.
Incorrect
An ideal CRO possesses five critical skills: (1) leadership, (2) power of persuasion, (3) ability to protect the firm’s assets, (4) technical skills to understand all risks, and (3) consulting skills to educate the board and business functions on risk management.
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Question 20 of 30
20. Question
There are seven components of a strong ERM (Enterprise Risk Management) framework. Which of the following are part of the seven components of a strong ERM framework?
I. Corporate governance
II. Line management
III. Portfolio management
IV. Stakeholder management
Correct
There are seven components of a strong ERM framework: (1) corporate governance, (2) line management, (3) portfolio management, (4) risk transfer, (5) risk analytics, (6) data and technology resources, and (7) stakeholder management.
Incorrect
There are seven components of a strong ERM framework: (1) corporate governance, (2) line management, (3) portfolio management, (4) risk transfer, (5) risk analytics, (6) data and technology resources, and (7) stakeholder management.
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Question 21 of 30
21. Question
What are the responsibilities for CRO (Chief Risk Officer) for all risks facing a company?
I. Market
II. Credit
III. Operational
IV. Liquidity risks
Correct
The CRO is responsible for all risks facing a company, including market, credit, operational, and liquidity risks, and specifically responsible for developing and implementing an ERM strategy.
Incorrect
The CRO is responsible for all risks facing a company, including market, credit, operational, and liquidity risks, and specifically responsible for developing and implementing an ERM strategy.
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Question 22 of 30
22. Question
What do CRO (Chief Risk Officer) provides for ERM (Enterprise Risk Management) and develops a framework of management policies, including setting the overall risk appetite of the firm?
I. Care
II. Leadership
III. Vision
IV. Direction
Correct
The CRO provides overall leadership, vision, and direction for ERM and develops a framework of management policies, including setting the overall risk appetite of the firm.
Incorrect
The CRO provides overall leadership, vision, and direction for ERM and develops a framework of management policies, including setting the overall risk appetite of the firm.
-
Question 23 of 30
23. Question
The CRO (Chief Risk Officer) provides overall leadership, vision, and direction for ERM (Enterprise Risk Management) and develops a framework of management policies, including setting the overall risk appetite of the firm. What are included to ensure the board and the key stakeholders understand the firm’s risk profile?
I. Measuring and quantifying risk
II. Setting risk limits
III. Developing the requisite risk systems
IV. Communicating a clear vision of the firm’s risk profile
Correct
This includes measuring and quantifying risks and setting risk limits, developing the requisite risk systems, and communicating a clear vision of the firm’s risk profile to the board and to key stakeholders.
Incorrect
This includes measuring and quantifying risks and setting risk limits, developing the requisite risk systems, and communicating a clear vision of the firm’s risk profile to the board and to key stakeholders.
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Question 24 of 30
24. Question
“Critical in the implementation of a successful ERM program and ensures that senior management and the board have the requisite organizational practices and processes to adequately control risks. ” Which of the following ERM framework matches the above description?
Correct
Corporate governance is critical in the implementation of a successful ERM program and ensures that senior management and the board have the requisite organizational practices and processes to adequately control risks.
Incorrect
Corporate governance is critical in the implementation of a successful ERM program and ensures that senior management and the board have the requisite organizational practices and processes to adequately control risks.
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Question 25 of 30
25. Question
‘Provides a holistic view of the firm’s risks if these risks are viewed as individual components of the aggregate risks facing the firm. ‘ Which of the following ERM framework matches the above description?
Correct
Portfolio management provides a holistic view of the firm’s risks if these risks are viewed as individual components of the aggregate risks facing the firm.
Incorrect
Portfolio management provides a holistic view of the firm’s risks if these risks are viewed as individual components of the aggregate risks facing the firm.
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Question 26 of 30
26. Question
This ERM framework facilitates communicating a firm’s internal risk management process to external stakeholders, including shareholders, creditors, regulator, and the public. Which of the following ERM framework matches the above description?
Correct
Stakeholder management facilitates communicating a firm’s internal risk management process to external stakeholders, including shareholders, creditors, regulators, and the public.
Incorrect
Stakeholder management facilitates communicating a firm’s internal risk management process to external stakeholders, including shareholders, creditors, regulators, and the public.
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Question 27 of 30
27. Question
Which of the following action should a firm’s internal risk management do when facing the organisation?
I. Should be transparent to stakeholders
II. Should provide adequate assurances that management follows prudent risk practices
III. Should include regular updates on the key risks factors
IV. Should ensure stakeholders understand all the information given
Correct
A firm’s internal risk management should be transparent to stakeholders, should provide adequate assurances that management follows prudent risk practices, and should include regular updates on the key risk factors facing the organization.
Incorrect
A firm’s internal risk management should be transparent to stakeholders, should provide adequate assurances that management follows prudent risk practices, and should include regular updates on the key risk factors facing the organization.
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Question 28 of 30
28. Question
What are the purpose of risk analytics?
I. Calculate the cost-effective way of reducing risk exposures
II. Evaluating the cost of managing risks in-house or externally as long as the cost of managing them externally is cheaper
III. Can be quantifies including credit, market, and operational risk
IV. Risk analysis, measurement and reporting
Correct
Many of the risks facing the firm can be quantified including credit, market, and operational risk. Risk analytics can be used to calculate the cost-effective way of reducing risk exposures. It is also useful in evaluating the cost of managing risks in-house or externally as long as the cost of managing them externally is cheaper.
Incorrect
Many of the risks facing the firm can be quantified including credit, market, and operational risk. Risk analytics can be used to calculate the cost-effective way of reducing risk exposures. It is also useful in evaluating the cost of managing risks in-house or externally as long as the cost of managing them externally is cheaper.
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Question 29 of 30
29. Question
Which of the following statements regarding the responsibilities of the chief risk officer (CRO) is least accurate?
Correct
While it is accurate that the CRO is responsible for top-level risk management, he is also responsible for the analytical or systems capabilities for risk management.
Incorrect
While it is accurate that the CRO is responsible for top-level risk management, he is also responsible for the analytical or systems capabilities for risk management.
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Question 30 of 30
30. Question
Tim Andrews sits on the board of directors of an Australian financial institution. Andrews read the following statements in a presentation made to the board of directors by management on the institution’s enterprise risk management strategies:
Statement 1: “To manage undesirable risks, the institution could use third-party protection, including insurance products. ”
Statement2: “Although third-party protection is expensive, this is a cost of business, and it is not possible to reduce these costs. ”
Andrews believes both of these statements are incorrect. Andrews’ assessment is accurate with respect to:
Correct
Statement 1 is, in fact, correct because when managing undesirable risks, an institution could use third-party protection, including various hedges and insurance products.
Incorrect
Statement 1 is, in fact, correct because when managing undesirable risks, an institution could use third-party protection, including various hedges and insurance products.