FINANCIAL RISK MANAGER (FRM) EXAMINATION
QUESTIONS AND CORRECT ANSWER WITH
EXPPLANATION GRADED A+ STUDY GUIDE SOUTHERN
NEW HAMPSHIRE UNIVERSITY
1. Financial risk management is primarily concerned with:
A. Identifying, measuring, and managing financial risks
B. Increasing sales
C. Reducing employees
D. Eliminating accounting
Answer: A
Rationale: FRM focuses on managing financial risks.
2. Market risk refers to:
A. Risk of losses due to market price changes
B. Risk of fraud only
C. Operational errors only
D. Tax risk only
Answer: A
Rationale: Market risk arises from price movements.
3. Credit risk is:
A. Risk of borrower default
B. Inflation risk
C. Liquidity gain
D. Market growth
Answer: A
Rationale: Credit risk involves default.
4. Operational risk arises from:
A. Internal process failures
B. Stock price changes
C. Interest rate changes
D. Currency changes
Answer: A
Rationale: It comes from internal failures.
,5. Liquidity risk is:
A. Inability to meet short-term obligations
B. High profits
C. Tax increase
D. Inflation decrease
Answer: A
Rationale: Liquidity is cash availability.
6. Systematic risk is:
A. Market-wide risk
B. Firm-specific risk
C. Avoidable risk
D. No risk
Answer: A
Rationale: It affects entire market.
7. Unsystematic risk is:
A. Diversifiable risk
B. Market risk
C. Inflation risk
D. Global risk
Answer: A
Rationale: It can be reduced by diversification.
8. Value at Risk (VaR) measures:
A. Potential loss over a period
B. Profit margin
C. Tax rate
D. Revenue growth
Answer: A
Rationale: VaR estimates risk exposure.
9. Expected shortfall is:
A. Average loss beyond VaR
B. Average profit
C. Revenue estimate
D. Tax liability
Answer: A
Rationale: It measures tail risk.
, 10. Standard deviation measures:
A. Volatility of returns
B. Profit
C. Revenue
D. Tax
Answer: A
Rationale: It measures risk dispersion.
11. Correlation measures:
A. Relationship between assets
B. Profit margin
C. Tax rate
D. Debt level
Answer: A
Rationale: Correlation shows co-movement.
12. Positive correlation means:
A. Assets move in same direction
B. Opposite movement
C. No movement
D. Random behavior
Answer: A
Rationale: They move together.
13. Negative correlation means:
A. Assets move opposite directions
B. Same direction
C. No relation
D. Fixed value
Answer: A
Rationale: One rises, the other falls.
14. Diversification reduces:
A. Unsystematic risk
B. Systematic risk
C. Market growth
D. Profit
Answer: A
Rationale: It spreads risk.
QUESTIONS AND CORRECT ANSWER WITH
EXPPLANATION GRADED A+ STUDY GUIDE SOUTHERN
NEW HAMPSHIRE UNIVERSITY
1. Financial risk management is primarily concerned with:
A. Identifying, measuring, and managing financial risks
B. Increasing sales
C. Reducing employees
D. Eliminating accounting
Answer: A
Rationale: FRM focuses on managing financial risks.
2. Market risk refers to:
A. Risk of losses due to market price changes
B. Risk of fraud only
C. Operational errors only
D. Tax risk only
Answer: A
Rationale: Market risk arises from price movements.
3. Credit risk is:
A. Risk of borrower default
B. Inflation risk
C. Liquidity gain
D. Market growth
Answer: A
Rationale: Credit risk involves default.
4. Operational risk arises from:
A. Internal process failures
B. Stock price changes
C. Interest rate changes
D. Currency changes
Answer: A
Rationale: It comes from internal failures.
,5. Liquidity risk is:
A. Inability to meet short-term obligations
B. High profits
C. Tax increase
D. Inflation decrease
Answer: A
Rationale: Liquidity is cash availability.
6. Systematic risk is:
A. Market-wide risk
B. Firm-specific risk
C. Avoidable risk
D. No risk
Answer: A
Rationale: It affects entire market.
7. Unsystematic risk is:
A. Diversifiable risk
B. Market risk
C. Inflation risk
D. Global risk
Answer: A
Rationale: It can be reduced by diversification.
8. Value at Risk (VaR) measures:
A. Potential loss over a period
B. Profit margin
C. Tax rate
D. Revenue growth
Answer: A
Rationale: VaR estimates risk exposure.
9. Expected shortfall is:
A. Average loss beyond VaR
B. Average profit
C. Revenue estimate
D. Tax liability
Answer: A
Rationale: It measures tail risk.
, 10. Standard deviation measures:
A. Volatility of returns
B. Profit
C. Revenue
D. Tax
Answer: A
Rationale: It measures risk dispersion.
11. Correlation measures:
A. Relationship between assets
B. Profit margin
C. Tax rate
D. Debt level
Answer: A
Rationale: Correlation shows co-movement.
12. Positive correlation means:
A. Assets move in same direction
B. Opposite movement
C. No movement
D. Random behavior
Answer: A
Rationale: They move together.
13. Negative correlation means:
A. Assets move opposite directions
B. Same direction
C. No relation
D. Fixed value
Answer: A
Rationale: One rises, the other falls.
14. Diversification reduces:
A. Unsystematic risk
B. Systematic risk
C. Market growth
D. Profit
Answer: A
Rationale: It spreads risk.
