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FRM Part II Practice Questions

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Our FRM part II practice questions are designed to strengthen your understanding of key concepts and gauge your preparation with respect to your peers around the world.

Each question in the FRM Part II QBank has been developed by certified FRMs to ensure the highest level of quality and relevance. As a sign of trust, you get exclusive access to hundreds of FRM part II practice questions as soon as you sign up. Thousands of candidates have used the question bank, with over 1 million questions answered.

Our practice questions are updated every year to ensure consistency with the most recent curriculum as outlined by the GARP.

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Our FRM part II practice questions are known, not just for their level of detail but also for their high level of complexity. Preparing using too easy questions is a sure way to get frustrated on the big day, and as much is shared by candidates on feedback forums. At AnalystPrep, we pride ourselves in thorough, continuously challenging questions that only make you a better-prepared candidate.

Our practice questions are subdivided according to readings to help you focus on a particular area at a time. If you need to gauge your knowledge on multiple readings, you can easily create a customized quiz with any number of questions.

We also include a comments section in each question through which you can link up with our experienced instructor for extra tips and tricks.

Free FRM Part 2 Practice Questions

Question 1

Estimating Market Risk Measures

Assuming that the P/L over a specified period is normally distributed and has a mean of 14.1 and a standard deviation of 28.2. What is the 95% VaR and the corresponding 99% VaR?

A) The 95% VaR is 32.289 and the 99% VaR is 51.4932

B) The 95% VaR is 36.495 and the 99% VaR is 51.556

C) The 95% VaR is 55.236 and the 99% VaR is 36.49551

D) The 95% VaR is 36.225 and the 99% VaR is 41.586

The correct answer is: A).

Recall that: αVaR = -µP/L + σP/Lzα ,

Therefore, the 95% VaR is: -14.1 + 28.2Z0.95 = -14.1 + 28.2 × 1.645 = 32.289

The 99% VaR is: -14.1 + 28.2Z0.99 = -14.1 + 28.2 × 2.326 = 51.4932

Question 2

Financial Correlation Modeling – Bottom-Up Approaches

A Gaussian copula maps the marginal distribution of each variable to which of the following distributions?

A) Lognormal distribution

B) Poisson distribution

C) Standard normal distribution

D) Binomial distribution

The correct answer is: C).

A Gaussian copula maps the marginal distribution of each variable to the standard normal distribution.

Question 3

Volatility Smiles

Suppose that a small-cap stock is priced at $0.6560. Suppose further that the European call and put options computed by Black-Scholes-Merton model are $0.0249 and $0.0501 respectively. Compute the market price of a FEB $0.75 call option if the market price of a FEB $0.75 put option is $0.0317.

A) $0.0065

B) $0.0025

C) $0.0337

D) $0.0654

The correct answer is: A).

For Black-Scholes-Merton model and in the absence of arbitrage opportunities, the put-call parity satisfies:
pBS + S0 e−qT = cBS Ke−rt

For the market prices, put-call parity holds when arbitrage opportunities are absent such that:
pMKT + S0 e−qT = cMKT Ke−rt

The difference between the two equations is:
pBS − pMKT = cBS − cMKT

From the question we have that:
cBS = 0.0249, pBS = 0.051 and pMKT = 0.0317

Thus:
0.0501 − 0.0317 = 0.0249 − cMKT
⇒ cMKT = 0.0065

Question 4

The Credit Analysis

Through the issuance of a qualified opinion, auditors would further limit an already boilerplate language. Which of the following wordings/phrases would signal a qualified opinion in the auditor’s report?

A) Any language that is out of the ordinary

B) Presence of the word “except” in the concluding paragraph

C) Financial statements are free from material misstatements

D) Evidence is examined on a “test basis”, implying that not all items are scrutinized

The correct answer is: B).

A qualified opinion is a statement issued after an audit is completed by a professional auditor, suggesting that the information provided is limited in scope and/or the company being edited has not maintained GAAP accounting principles.

The presence of the word “except” in the concluding paragraph of an audit opinion is an evidence of a qualified opinion. All other phrases could be found in a classical clean or unqualified auditor’s report, or in other words, a standard format, boilerplate language.

Question 5

Structured Credit Risk

Which one of the following is typically true with respect to the number of attachment and detachment points of equity, mezzanine, and senior tranches?

A) Equity: (1 attachment, 0 detachment); Junior debt: (1 attachment, 1 detachment); Senior debt: (0 attachment, 1 detachment)

B) Equity: (1 attachment, 0 detachment); Junior debt: (0 attachment, 0 detachment); Senior debt: (0 attachment, 1 detachment)

C) Equity: (0 attachment, 1 detachment); Junior debt: (1 attachment, 1 detachment); Senior debt: (1 attachment, 0 detachment)

D) Equity: (1 attachment, 0 detachment); Junior debt: (0 attachment, 0 detachment); Senior debt: (0 attachment, 1 detachment)

The correct answer is: C).

A tranche of CDO is defined by attachment and detachment points. The attachment point defines the amount of subordination a tranche enjoys. The tranche thickness, measured by subtracting the attachment point from the detachment point, represents the maximum loss that can be sustained.

Tranche attachment and detachment points refer to portfolio losses, not defaults. Assuming a loss given default of 50 percent, the 7 to 10 percent tranche can withstand defaults of up to 14 percent of the portfolio (14% * 50% = 7%, the attachment point) before it sustains losses.

The equity tranche has only 1 detachment point, while the most senior debt has only 1 attachment point.

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Question 6

Wrong-Way Risk

The process of quantifying wrong-way risk requires modeling of the relationship between default probability and exposure. Besides a lack of relevant historical data, the other common pitfall that makes the process quite difficult has a lot to do with the fact that:

I. It requires expensive computer software to guarantee reliable results
II. It requires considerable investment of time and expertise
III. It is easy to misrepresent the dependency between credit spreads and exposure

A) II

B) II & III

C) III

D) None of the above

The correct answer is: C).

The dependency between credit spreads and exposure can be misrepresented leading to unreliable results. For example, instead of a cause-effect relationship, the dependency could be assumed to be correlative.

Question 7

Information Risk and Data Quality Management

Several acts and directives provide regulation and guidelines for improvement of data-related processes, as well as prevention of criminal activity. Which of the following documents outlines financial institutions’ obligation to “respect the privacy of its customers and to protect the security and confidentiality of the customers’ nonpublic personal information”?

A) The Basel II Accords of 2004

B) The Gramm-Leach-Bliley Act of 1999

C) The Sarbanes-Oxley Act of 2002

D) The USA PATRIOT Act of 2001

The correct answer is: B).

The Gramm-Leach-Bliley Act of 1999, also known as the Financial Services Modernization Act of 1999, required financial institutions to “respect the privacy of its customers and to protect the security and confidentiality of those customers’ nonpublic personal information.” In more precise terms, the Act required financial institutions offering consumers loan services, financial or investment advice, and/or insurance, to fully explain their information-sharing practices to their customers. Firms must allow their customers the option to “opt-out” if they do not want their sensitive information shared. While many consider critical information, such as bank balances and account numbers, to be confidential, in reality this data is consistently bought and sold by banks, credit card companies, and others. Gramm-Leach-Bliley required limited privacy protections against such personal data sales, along with pretexting (obtaining personal information through false pretenses).

Question 8

Repurchase Agreements and Financing

Assuming that a counterparty X sells a €250 million face amount of DBR 4’s of December 9th, 2014, to a counterparty Y, for settlement on April 1st, 2013, at an invoice price of €280.131 million. At the same time, counterparty X decides to rebuy the €250 million face amount five months later, for settlement on September 1st 2013 at a purchase rate equivalent to the invoice price including interest at a repo rate of 0.31%. Compute the repurchase price.

A) €250.166 million

B) €259.187 million

C) €281.129 million

D) €280.500 million

The correct answer is: D).

By applying the actual/360 convention popular for most money market instruments, and using 153 days between April 1st and September 1st.

Therefore:

€280,131,000 (1 + (0.0031 × 153)/360) = €280,500,072

≈ €280.5 Million

Question 9

Illiquid Assets

People tend to overstate expected returns and understate the risk of illiquid assets. This is due to certain biases that affect their judgment. These biases include all of the following, except the:

A) Survivorship bias

B) Infrequent sampling bias

C) Selection bias

D) Availability bias

The correct answer is: D).

The biases that cause people to overstate the expected returns and understate the risk of illiquid assets include:

Survivorship bias: poor performance and failures are not reported

Infrequent sampling bias: due to infrequent trading the estimates of risk are too low when computed using reported returns.

Selection bias: results from the tendency of returns only to be observed when underlying asset values are high.