Practice Quiz

FRM Financial Risk Manager Practice Test - Question List

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26. The covariance of two risky assets measures how two returns of two assets move in relation to each other. What happens to the relation between the two returns if the covariance is negative?
  1. Two returns move in the same direction.
  2. Two returns move in opposite directions.
  3. Two returns are equal.
  4. Two returns do not have any relation.
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27. Tom has decided to invest in different assets simultaneously in order to reduce risks. What is this strategy called?
  1. Multiple investments.
  2. Diversification.
  3. Risk reduction.
  4. Shared partnership.
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28. What is true about the risk free rate?
  1. The risk free rate represents the interest an investor would expect from an absolutely risk free investment over a specified period of time.
  2. The risk free rate is the minimum return that an investor expects for any investment. A rational investor will not accept any additional risk unless the potential rate of return is greater than the risk free rate.
  3. The risk-free rate does not truly exist because even the safest investments carry a very small amount of risk.
  4. All of the above.
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29. According to the CAPM model: Expected Return = Risk free rate + Risk premium. For investors like David, the model compensates the time value of his money and risk when he invests into any investment over a period of time. What does the risk free rate compensate David for?
  1. The time value of his money.
  2. The risk he takes.
  3. Both the time value of his money and the risk he takes.
  4. None
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30. Beta provides a measure of the "systematic risk" of the portfolio. This is the part of the risk that cannot be diversified away. Given that the portfolio risk is measured by its covariance, why are investors still willing to hold assets with lower expected returns?
  1. Assets with low expected returns now can yield higher returns in the future.
  2. Investors do not have any other better alternatives.
  3. Although these assets have low expected returns, they are less risky due to low overall systematic risk.
  4. Low expected returns attract less investors, so it is difficult to sell them.
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