Free FRM Part II: Financial Risk Manager Exam Questions and Answers
FRM Part II is the second and final exam for GARP's Financial Risk Manager designation, and it applies the tools from Part I to real risk management. It is 80 multiple-choice questions in four hours, on computer, in the same May, August and November windows. The topics are market risk, credit risk, operational risk and resilience, liquidity and treasury risk, risk management and investment management, and current issues in financial markets — GARP refreshes the readings each year. It can be taken on the same day as Part I but is graded only after Part I is passed, and the designation also requires two years of relevant work experience.
If you searched for FRM Part II: Financial Risk Manager dumps, an ExamTopics discussion or a free PDF, this is the question bank for it: practice questions with verified answers and explanations, a timed practice test and updates whenever GARP changes the exam.
Last updated: October 20, 2026
- Provider
- GARP
- Questions in our bank
- 1000+
- Free to read
- First 10, with answers
- Official page
- Official Exam website
- Our test mode duration & pass mark
- 130 mins · 70%
- Verified answers
- Reviewed weekly
Recommended: Switch to Test Mode to start a practice test that simulates the real exam experience.
Question #1
Which of the following is the primary advantage of using historical simulation over parametric VaR for calculating market risk?
Correct answer: B
Explanation
Historical simulation is a non-parametric approach that uses actual historical returns to estimate potential losses. Its key advantage is that it captures fat tails, skewness, and non-linear relationships (like those in options) without making distributional assumptions. It does not assume normal distribution (A is wrong), typically requires more computational power (C is wrong), and may be less precise for small samples (D is wrong).
Question #2
A bank uses a delta-normal VaR model to estimate the risk of an option portfolio. During a market crash, the VaR estimate significantly underestimated actual losses. What is the most likely cause of this underestimation?
Correct answer: B
Explanation
The delta-normal VaR model uses only the first-order sensitivity (delta) to price changes. During extreme market movements, the second-order gamma effects (convexity) become significant, especially for options. This causes the linear approximation to break down, leading to significant underestimation of losses during crashes.
Question #3
Which VaR method is most appropriate for a portfolio containing complex exotic options that exhibit significant gamma and vega risk?
Correct answer: C
Explanation
Monte Carlo simulation with full revaluation is most appropriate for complex exotic options. It generates random price paths and fully revalues the option at each simulation step, properly capturing all Greeks (delta, gamma, vega, theta). Delta-normal (A) misses gamma effects. Historical simulation (B) may not capture all risk factors. EWMA (D) is for volatility estimation, not the method itself.
Question #4
A risk manager uses the square root rule to scale a 1-day VaR of $1 million to a 10-day VaR of $3.16 million. What assumption is this approach making?
Correct answer: B
Explanation
The square root rule (multiplying by √T) assumes returns are independently and identically distributed (i.i.d.). This means returns have no serial correlation and volatility scales with the square root of time. If returns were correlated (A), volatility would scale differently. The rule actually assumes constant volatility, not increasing (C). Fat tails (D) would violate i.i.d. assumptions.
Question #5
What is a key disadvantage of historical simulation VaR compared to parametric VaR?
Correct answer: B
Explanation
Historical simulation is highly dependent on the choice of historical window. If the window includes a crisis period, VaR will be high; if it excludes recent turbulent periods, VaR may be too low. Historical simulation CAN handle non-linear instruments (A is wrong), does NOT assume normal distribution (C is wrong), and does NOT require correlation matrices (D is wrong).
Question #6
A portfolio manager estimates 95% VaR using 1,000 historical observations. How many observations fall in the tail used for the VaR calculation?
Correct answer: B
Explanation
For 95% VaR, 5% of observations are in the tail. With 1,000 observations: 0.05 × 1,000 = 50 observations fall in the tail. The VaR is typically estimated as the loss at the threshold of these 50 worst observations (or the 51st worst observation depending on interpolation method).
Question #7
In stressed VaR calculations, which time period does Basel III require banks to use as a reference for stress testing?
Correct answer: B
Explanation
Basel III requires banks to identify a period of significant financial stress relevant to their specific portfolio, not just a generic crisis period. While the 2008-2009 crisis (A) is commonly used, banks must select a stress period that reflects risks in their actual positions. The choice depends on the bank's trading activities and risk factors.
Question #8
A risk manager observes that the empirical distribution of portfolio returns has fatter tails than a normal distribution. Which risk measure would be most appropriate to supplement VaR?
Correct answer: B
Explanation
Expected Shortfall (ES), also known as Conditional VaR (CVaR), measures the average loss beyond the VaR threshold. Unlike VaR, which only looks at a single point, ES captures the magnitude of tail losses and is more sensitive to fat tails. It's the preferred supplement when tail risk is a concern.
Question #9
Which of the following best describes the "ghost effect" in filtered historical simulation?
Correct answer: B
Explanation
The "ghost effect" occurs in filtered historical simulation when extreme returns from the past (scaled by current volatility) create spikes in VaR estimates, even when current market conditions are calm. This happens because extreme historical returns, when adjusted by current GARCH volatility, can produce artificially large VaR figures that may not reflect true current risk.
Question #10
A bank uses Monte Carlo simulation with 10,000 paths to calculate VaR. To improve the precision of the VaR estimate at the 99% confidence level, what is the most effective approach?
Correct answer: B
Explanation
Importance sampling is a variance reduction technique that focuses computational effort on the tail region of the distribution - exactly where VaR estimates are made. For 99% VaR, only 1% of standard simulations fall in the tail, making estimates noisy. Importance sampling generates more scenarios in the tail region, dramatically improving precision without requiring exponentially more simulations.
Discussion
Explain your reasoning, not just the letterOther GARP certifications
Reviews
Write a review★★★★★
Exam Practice is worth every penny. The mock exams are realistic, and the feedback helped me focus on key areas.
Amit SharmaVerified buyer
★★★★★
I highly recommend Exam Practice. The feedback after each test helped me improve significantly, and I passed my exams easily.
Oscar NyströmVerified buyer
★★★★★
This platform is a lifesaver. The practice questions and explanations are so detailed. It’s the best study tool I’ve ever used.
Hannah SmithVerified buyer
FAQ
Learn More: https://www.garp.org/scr
- Q1: What is the FRM Part II: Financial Risk Manager exam?
- A: FRM Part II: Financial Risk Manager is a GARP certification exam. Judging by the questions in our bank, it concentrates on simulation, portfolio, historical and estimate.
- Q2: What topics does the FRM Part II: Financial Risk Manager exam cover?
- A: Questions in our FRM Part II: Financial Risk Manager bank cluster around simulation, portfolio, historical and estimate. Working through the full set is the quickest way to find which of these you are weakest on.
- Q3: How should I prepare for FRM Part II: Financial Risk Manager?
- A: Work through the FRM Part II: Financial Risk Manager practice questions here, checking your answer on each one, then sit the practice test to rehearse the exam under timed conditions before the real thing.
- Q4: Are these real FRM Part II: Financial Risk Manager exam questions?
- A: They are drawn from officially released past questions and from community members who have sat FRM Part II: Financial Risk Manager. Answers are verified and updated weekly.
- Q5: Where do I register for the FRM Part II: Financial Risk Manager exam?
- A: Register through GARP directly at https://www.garp.org/frm. Exampractice is not affiliated with GARP and does not administer the exam.
- Q6: Is there a free FRM Part II: Financial Risk Manager sample?
- A: Yes. Every FRM Part II: Financial Risk Manager page shows a free sample of real questions. Upgrading opens the full bank and the practice test.
- Q7: What are GARP Certification Exams?
- A: GARP (Global Association of Risk Professionals) Certification Exams validate your expertise in risk management, particularly in financial risk management and energy risk management. These certifications demonstrate your proficiency in identifying, assessing, and managing various types of financial risks.
- Q8: Why should I pursue GARP Certification?
- A: GARP Certification enhances your professional credibility, showcasing your skills and knowledge in risk management. This can lead to better job opportunities, higher salaries, and career advancement in finance, banking, and risk management sectors.
- Q9: What are the benefits of GARP Certification?
- A: Benefits include recognition as a certified risk professional, improved job performance, access to exclusive resources, continuing education opportunities, and staying current with the latest risk management practices and industry standards.
- Q10: Who should take GARP Certification Exams?
- A: Risk managers, financial analysts, compliance officers, investment professionals, and anyone involved in managing financial or energy risks should consider these certifications to validate their expertise and advance their careers.
- Q11: What types of GARP Certification Exams are available?
- A: GARP offers two main certification paths:
- Q12: How do I prepare for GARP Certification Exams?
- A: Preparation can include official GARP study materials, preparatory courses, practice exams, online tutorials, and hands-on experience in risk management.
- Q13: Where can I take GARP Certification Exams?
- A: GARP Certification Exams can be taken at authorized testing centers worldwide, providing flexibility to fit your schedule and location.
- Q14: How do GARP Certifications impact my career?
- A: GARP Certifications significantly boost your career by demonstrating your expertise to employers, making you a more competitive candidate for advanced roles and promotions in finance and risk management.
- Q15: Are there any prerequisites for GARP Certification Exams?
- A: While there are no formal prerequisites for taking the FRM or ERP exams, candidates typically benefit from having a strong foundation in finance, mathematics, and risk management concepts.
- Q16: How often do I need to recertify for GARP Certifications?
- A: GARP Certifications do not have a formal recertification process, but certified professionals are encouraged to engage in continuous professional development to stay updated with the latest industry practices and standards.