Free GARP FRM-Part-2 Exam Questions

Become GARP Certified with updated FRM-Part-2 exam questions and correct answers

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Total 503 Questions | Updated On: Jul 30, 2025

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Question 1

Which of the following risks is specifically recognized by the incremental risk charge (IRC)?

A : Jump-to-default risk, as measured by 99% VaR, because a default could cause a significant loss for the bank.

B : Equity price risk, because a change in market prices could materially impact mark-to-market accounting for risk.

C : Expected shortfall risk, because it is important to understand the amount of loss potential in the tail.

D : Interest rate risk, as measured by 97.5% expected shortfall, because an increase in interest rates could cause a significant loss for the bank.

Answer: A

Question 2

A risk manager at MAB Funds estimates that the fund’s one-week value at risk (VaR) is $1 million using a 95% probability. The fund can, therefore, be expected to lose:

A : no more than $1 million in a week 5% of the time.

B : no more than $1 million in a week 95% of the time.

C : an average of $1 million in a week 5% of the time.

D : an average of $1 million in a week 95% of the time.

Answer: B

Question 3

Two financial institutions are facing different funding issues. Bank A, a mid-size regional bank is concerned that it has a shortfall in legal reserves for the day and is seeking an alternative to address this shortfall. Bank B, a small community bank, on the other hand, has recently experienced a much greater than anticipated shortfall in long term certificates of deposit (CD) renewals due to fierce local competition for retail deposits. Bank B has traditionally used stable CDs to fund its home mortgage portfolio. What is the most appropriate funding response of each of these two institutions considering timing and the availability of non-deposit funds?

A : Bank A should issue debentures and Bank B should fund itself through the CP market.

B : Bank A should borrow from the wholesale deposit market and Bank B should fund itself through the Eurocurrency deposit market.

C : Bank A should fund itself through the commercial paper (CP) market and Bank B should borrow from the Federal funds market.

D : Bank A should borrow from the Federal funds market and Bank B should borrow from the Federal Home Loan Banks.

Answer: D

Question 4

A newly hired risk analyst at a large investment bank is examining how financial correlation risk affects the bank’s portfolios. The bank holds portfolios consisting of different types of assets and enters into various hedging contracts with multiple counterparties. Which of the following statements would the analyst be correct to make?

A : The buyer of a CDS faces wrong-way risk when there is a positive default correlation between the reference asset and the CDS counterparty.

B : The risk-adjusted return of a portfolio typically increases when correlations of assets in the portfolio increase.

C : Correlation risk is highest during periods of relatively benign market movements when correlations are difficult to predict.

D : Dynamic correlation risk in a portfolio of pairs trades is most appropriately estimated using Gaussian copulas.

Answer: A

Question 5

A portfolio has an equal amount invested in two positions, X and Y. The expected excess return of X is 9% and that of Y is 12%. Their marginal VaRs are 0.06 and 0.075, respectively. To move toward the optimal portfolio, the manager will probably:

A : do nothing because the information is insufficient.

B : increase the allocation in Y and/or lower that in X.

C : increase the allocation in X and/or lower that in Y.

D : not change the portfolio because it is already optimal.

Answer: B

Page: 1 / 101

Total 503 Questions | Updated On: Jul 30, 2025

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