FRM Sample Questions and Practice Quiz

Preparing for the Financial Risk Manager (FRM) exam can be challenging, but practicing with sample questions and mock exams can make all the difference. It doesn’t matter if you’re studying risk models, credit risk, or market risk measurement; practicing these concepts can help you become more confident in your exam preparation. This guide will take you through some tips and practice questions to get you started.

Here’s a quick sample question to test your knowledge:

Practice Question:
A portfolio manager is evaluating the risk of a bond portfolio. If the bonds have an average duration of 5 years and interest rates are expected to increase by 1%, what is the approximate percentage change in the portfolio’s value?

Curious about the answer? Read on to find out!

Key Takeaways

• Practice exams and mock exams help FRM candidates.
• FRM candidates should focus on critical areas such as credit risk, market risk measurement, and valuation and risk models.
• Reviewing correct answers with detailed explanations is crucial for adequate exam preparation.

What to Expect on the FRM Exam

There are two different parts of the exam that focus on different risk management areas. Here’s a quick overview:

FRM Exam Part I covers:

• Foundations of risk management
• Quantitative analysis (including topics like the central limit theorem and normal distribution)
• Financial markets and products
• Valuation and risk models

FRM Exam Part II focuses on:

• Market risk measurement and management
• Credit risk measurement and management
• Operational and integrated risk management
• Risk management in investment management
• Current issues in financial markets

Sample FRM Questions

Question 1: What is the purpose of Value-at-Risk (VaR) in financial risk management?
A) To estimate potential losses over a given time period
B) To predict market trends
C) To determine asset liquidity
D) To calculate portfolio returns
Correct Answer: A) To estimate potential losses over a given time

Question 2: Which of the following is a component of credit risk?
A) Market volatility
B) Default Probability
C) Liquidity premium
D) Dividend yield
Correct Answer: B) Default Probability

Question 3: What does operational risk primarily involve?
A) Interest rate fluctuations
B) Losses due to internal processes, systems, or people
C) Currency exchange risk
D) Decline in equity prices
Correct Answer: B) Losses due to internal processes, systems, or people

Question 4: What is the primary focus of stress testing in financial risk management?
A) Assessing the impact of extreme but plausible scenarios
B) Determining daily operational risks
C) Calculating quarterly profits
D) Measuring stock performance
Correct Answer: A) Assessing the impact of extreme but plausible scenarios

Question 5: What is the normal distribution used for in risk models?
A) Estimating the average rate of return
B) Modeling the probability distribution of returns
C) Calculating asset depreciation
D) Predicting long-term stock prices
Correct Answer: B) Modeling the probability distribution of returns

Question 6: Which type of risk does diversification help manage?
A) Systematic risk
B) Credit risk
C) Operational risk
D) Unsystematic risk
Correct Answer: D) Unsystematic risk

Question 7: What is a futures contract?
A) A contract to buy or sell an asset at a predetermined price in the future
B) An agreement to hedge against operational risk
C) A corporate bond
D) A pooled investment vehicle
Correct Answer: A) A contract to buy or sell an asset at a predetermined price in the future

Question 8: What is the purpose of calculating Expected Loss (EL)?
A) To measure potential profits from an investment
B) To estimate potential financial loss from default
C) To predict fluctuations in asset prices
D) To calculate dividend payments
Correct Answer: B) To estimate potential financial loss from default

Question 9: What is liquidity risk?
A) The risk of not being able to buy or sell an asset quickly
B) The risk of inflation eroding purchasing power
C) The risk of default on a loan
D) The risk of market manipulation
Correct Answer: A) The risk of not being able to buy or sell an asset quickly

Question 10: What does the central limit theorem describe?
A) The mean of a large number of independent observations will be normally distributed
B) The likelihood of a company defaulting on its obligations
C) The impact of interest rate changes on bond prices
D) The volatility of the stock market
Correct Answer: A) The mean of a large number of independent observations will be normally distributed

Question 11: What is the purpose of financial institutions’ risk-weighted assets (RWA)?
A) To calculate the capital adequacy of a bank
B) To estimate operational efficiency
C) To project dividend payouts
D) To predict stock market performance
Correct Answer: A) To calculate the capital adequacy of a bank

Question 12: Which of the following is a primary concern in operational risk management?
A) System failures
B) Currency fluctuations
C) Stock price volatility
D) Interest rate changes
Correct Answer: A) System failures

Question 13: What is the role of the risk-free rate in financial models?
A) It serves as the return on an investment with zero risk
B) It represents the return on a high-risk investment
C) It predicts stock price volatility
D) It determines the cost of capital for a company
Correct Answer: A) It serves as the return on an investment with zero risk

Question 14: What does credit risk primarily involve?
A) The risk that borrowers will default on their debt obligations
B) The risk that inflation will decrease purchasing power
C) The risk that a company will lose market share
D) The risk that interest rates will rise
Correct Answer: A) The risk that borrowers will default on their debt obligations

Question 15: What does the term “spot price” refer to?
A) The current price at which an asset can be bought or can be sold
B) price of a future contract
C) The interest rate on government bonds
D) The projected dividend of a stock
Correct Answer: A) The current price at which an asset can be bought or can be sold

Question 16: What is meant by “systematic risk”?
A) The risk that affects the entire market or economy
B) The risk that affects a single stock
C) The risk of technological failures
D) The risk of currency devaluation
Correct Answer: A) The risk that affects the entire market or economy

Question 17: What is the primary purpose of the Basel Accords in banking?
A) To set international standards for risk management and capital adequacy
B) To regulate stock market transactions
C) To predict economic growth
D) To oversee individual investment portfolios
Correct Answer: A) To set international standards for risk management and capital adequacy

Question 18: What is the primary function of a risk measure in financial analysis?
A) To quantify the potential loss of an investment
B) To forecast economic conditions
C) To determine future stock prices
D) To evaluate corporate governance
Correct Answer: A) To quantify the potential loss of an investment

Question 19: What does the term “VaR” (Value-at-Risk) represent in risk management?
A) The maximum potential loss over a specific time period
B) The volatility of a stock over a year
C) The expected return on an investment
D) The average loss during a financial crisis
Correct Answer: A) The maximum potential loss over a specific time period

How Practice Exams Can Help

Practicing exams is one of the best ways to prepare for the FRM. Practice exams offer:

• A feel for the structure and timing of the exam
• Exposure to the types of questions you’ll face, such as those covering credit risk and risk measures
• A chance to identify which areas you need to improve
• An opportunity to review correct answers and learn from detailed explanations

Using FRM Sample Questions

• Master the Core Concepts: Ensure a solid grasp of essential topics like risk measures, the central limit theorem, and credit risk. These fundamentals will form the backbone of your exam success.
• Dive Deep into Explanations: After completing each practice question, carefully review the answers and detailed explanations. This will help your understanding and highlight areas that need further review.
• Vary Your Question Styles: Mix your practice with native problems and risk management scenarios. Tackling a range of question types will improve your adaptability and problem-solving skills.
• Utilize Top FRM Prep Providers: Consider using one of the best FRM prep courses, such as Kaplan Schweser or Bionic Turtle, to access high-quality questions and mock exams that mirror the actual test.
• Simulate Exam Conditions: Time yourself while practicing to get accustomed to the exam’s pace. This will help improve your time management and reduce stress on exam day.

Final Thoughts

Preparing for the FRM exam requires dedication and consistent practice. By working through sample questions and mock exams, you’ll gain a strong understanding of critical concepts such as risk measures, market risk, and credit risk. For example, in the sample question, providing interest rates would result in a 5% decrease in the bond portfolio’s value, thanks to the relationship between interest rates and bond duration. Keep testing yourself, reviewing explanations, and focusing on areas that need improvement to boost your confidence and ensure success on the exam.

Frequently Asked Questions