FINANCIAL RISK MANAGER
EXAMINATION (FRM) QUESTIONS AND
CORRECT ANSWERS (VERIFIED
ANSWERS) PLUS RATIONALES 2026 Q&A
| INSTANT DOWNLOAD PDF
1. A portfolio’s systematic risk is best measured by:
A. Standard deviation
B. Beta
C. Variance
D. Value at risk
Correct Answer: B. Beta
Rationale: Beta measures sensitivity of a portfolio to market movements,
representing systematic risk.
2. Which of the following is a characteristic of Value at Risk (VaR)?
A. It measures expected loss in extreme cases
B. It estimates maximum loss over a time horizon at a confidence level
C. It eliminates market risk
D. It guarantees no loss beyond the threshold
Correct Answer: B. It estimates maximum loss over a time horizon at a
confidence level
Rationale: VaR estimates potential loss under normal market conditions at
a given confidence level.
3. Credit risk refers to:
A. Risk of market price fluctuations
B. Risk of borrower default
C. Liquidity shortage risk
, D. Operational failure risk
Correct Answer: B. Risk of borrower default
Rationale: Credit risk is the possibility that a borrower fails to meet
obligations.
4. Diversification primarily reduces:
A. Systematic risk
B. Unsystematic risk
C. Inflation risk
D. Interest rate risk
Correct Answer: B. Unsystematic risk
Rationale: Diversification eliminates firm-specific (unsystematic) risk but
not market risk.
5. Which model is used for pricing options?
A. CAPM
B. Black-Scholes model
C. Gordon Growth Model
D. Arbitrage Pricing Theory
Correct Answer: B. Black-Scholes model
Rationale: Black-Scholes is widely used for option valuation.
6. Liquidity risk is:
A. Risk of asset price decline
B. Risk of not being able to meet short-term obligations
C. Risk of default
D. Risk of inflation
Correct Answer: B. Risk of not being able to meet short-term obligations
Rationale: Liquidity risk refers to inability to convert assets or meet cash
needs.
7. Expected shortfall is also known as:
A. Conditional VaR
B. Beta risk
C. Market risk
, D. Standard deviation
Correct Answer: A. Conditional VaR
Rationale: Expected shortfall measures average loss beyond VaR
threshold.
8. Operational risk includes:
A. Interest rate changes
B. Market crashes
C. Internal fraud or system failures
D. Inflation changes
Correct Answer: C. Internal fraud or system failures
Rationale: Operational risk arises from internal processes or failures.
9. Which is NOT a derivative?
A. Futures
B. Options
C. Bonds
D. Swaps
Correct Answer: C. Bonds
Rationale: Bonds are debt instruments, not derivatives.
10.The Sharpe ratio measures:
A. Liquidity risk
B. Risk-adjusted return
C. Credit risk
D. Market volatility only
Correct Answer: B. Risk-adjusted return
Rationale: Sharpe ratio evaluates excess return per unit of risk.
11.Systematic risk is also called:
A. Diversifiable risk
B. Non-market risk
C. Market risk
D. Firm-specific risk
EXAMINATION (FRM) QUESTIONS AND
CORRECT ANSWERS (VERIFIED
ANSWERS) PLUS RATIONALES 2026 Q&A
| INSTANT DOWNLOAD PDF
1. A portfolio’s systematic risk is best measured by:
A. Standard deviation
B. Beta
C. Variance
D. Value at risk
Correct Answer: B. Beta
Rationale: Beta measures sensitivity of a portfolio to market movements,
representing systematic risk.
2. Which of the following is a characteristic of Value at Risk (VaR)?
A. It measures expected loss in extreme cases
B. It estimates maximum loss over a time horizon at a confidence level
C. It eliminates market risk
D. It guarantees no loss beyond the threshold
Correct Answer: B. It estimates maximum loss over a time horizon at a
confidence level
Rationale: VaR estimates potential loss under normal market conditions at
a given confidence level.
3. Credit risk refers to:
A. Risk of market price fluctuations
B. Risk of borrower default
C. Liquidity shortage risk
, D. Operational failure risk
Correct Answer: B. Risk of borrower default
Rationale: Credit risk is the possibility that a borrower fails to meet
obligations.
4. Diversification primarily reduces:
A. Systematic risk
B. Unsystematic risk
C. Inflation risk
D. Interest rate risk
Correct Answer: B. Unsystematic risk
Rationale: Diversification eliminates firm-specific (unsystematic) risk but
not market risk.
5. Which model is used for pricing options?
A. CAPM
B. Black-Scholes model
C. Gordon Growth Model
D. Arbitrage Pricing Theory
Correct Answer: B. Black-Scholes model
Rationale: Black-Scholes is widely used for option valuation.
6. Liquidity risk is:
A. Risk of asset price decline
B. Risk of not being able to meet short-term obligations
C. Risk of default
D. Risk of inflation
Correct Answer: B. Risk of not being able to meet short-term obligations
Rationale: Liquidity risk refers to inability to convert assets or meet cash
needs.
7. Expected shortfall is also known as:
A. Conditional VaR
B. Beta risk
C. Market risk
, D. Standard deviation
Correct Answer: A. Conditional VaR
Rationale: Expected shortfall measures average loss beyond VaR
threshold.
8. Operational risk includes:
A. Interest rate changes
B. Market crashes
C. Internal fraud or system failures
D. Inflation changes
Correct Answer: C. Internal fraud or system failures
Rationale: Operational risk arises from internal processes or failures.
9. Which is NOT a derivative?
A. Futures
B. Options
C. Bonds
D. Swaps
Correct Answer: C. Bonds
Rationale: Bonds are debt instruments, not derivatives.
10.The Sharpe ratio measures:
A. Liquidity risk
B. Risk-adjusted return
C. Credit risk
D. Market volatility only
Correct Answer: B. Risk-adjusted return
Rationale: Sharpe ratio evaluates excess return per unit of risk.
11.Systematic risk is also called:
A. Diversifiable risk
B. Non-market risk
C. Market risk
D. Firm-specific risk
