FRM PART II EXAM STUDY GUIDE
2026/2027 – ACCURATE
QUESTIONS WITH CORRECT
DETAILED SOLUTIONS | NEWEST
VERSION
Description: This comprehensive revision set contains 200 multiple-choice questions
covering the entire FRM Part II curriculum. Each question is followed by the correct
answer marked with ✅ and a detailed solution to reinforce understanding. Keywords
are bolded for quick recall. Answers are intentionally mixed (not aligned to a single
letter) to simulate the real exam.
Keywords: FRM Part II, Market Risk, Credit Risk, Operational Risk, Liquidity Risk,
Investment Management, Current Issues, Basel III, VaR, Expected Shortfall, CVA, DVA,
PFE, LCR, NSFR, Stress Testing, Backtesting, Model Risk, Cybersecurity, Climate Risk,
Libor Transition, SOFR, CCP, Margin, Collateral, Securitization, SPV, CDO, CDS, Merton
Model, KMV, CreditMetrics, CreditRisk+, Operational Risk Capital, AMA, SMA, BIA, SA,
ICAAP, Recovery Rate, PD, LGD, EAD, CVA, DVA, FVA, MVA, KVA, XVA, etc.
SECTION 1: MARKET RISK (Questions 1–40)
Q1. Which of the following best describes Expected Shortfall (ES) compared to Value
at Risk (VaR)?
,A) ES is not a coherent risk measure
B) ES considers tail risk beyond the VaR threshold ✅
C) ES is always lower than VaR
D) ES cannot be backtested
Solution: ES (also called Conditional VaR) is the average loss beyond the VaR level, thus
captures tail risk. It is coherent and can be backtested.
Q2. A portfolio has a 1-day 99% VaR of $2 million. What does this imply?
A) The maximum loss over 1 day is $2 million
B) There is a 1% chance of losing more than $2 million in one day ✅
C) The average loss is $2 million
D) 99% of the time, losses exceed $2 million
Solution: VaR at 99% means 1% probability of exceeding that loss.
Q3. Which Basel Committee document introduced the Fundamental Review of the
Trading Book (FRTB)?
A) Basel I
B) Basel II
C) Basel III ✅
D) Basel IV
Solution: FRTB is part of Basel III reforms, published in 2016 and revised in 2019.
,Q4. In FRTB, the Standardised Approach (SA) uses which of the following for market
risk?
A) Internal models only
B) Sensitivities-based method ✅
C) Historical simulation
D) Monte Carlo simulation
Solution: FRTB SA uses sensitivities-based method, default risk charge, and residual risk
add-on.
Q5. Backtesting a VaR model at 99% confidence with 250 days of data. How many
exceptions are allowed before the model is considered red zone under Basel?
A) 0–4
B) 5–9
C) 10+ ✅
D) 15+
Solution: Basel traffic light: Green (0–4), Yellow (5–9), Red (10+).
Q6. Which of the following is a coherent risk measure?
A) VaR
B) Expected Shortfall ✅
C) Standard deviation
D) Beta
, Solution: ES satisfies monotonicity, sub-additivity, homogeneity, and translation
invariance. VaR does not satisfy sub-additivity.
Q7. GARCH(1,1) model is used for:
A) Estimating default probability
B) Modeling volatility clustering ✅
C) Pricing options
D) Credit scoring
Solution: GARCH models conditional variance and captures volatility clustering.
Q8. The volatility smile refers to:
A) Implied volatility varying with strike price ✅
B) Historical volatility increasing over time
C) Volatility being constant
D) Volatility decreasing with maturity
Solution: Volatility smile shows implied vol is higher for deep ITM/OTM options than
ATM.
Q9. Delta-normal VaR assumes:
A) Linear payoffs and normal returns ✅
B) Non-linear payoffs
2026/2027 – ACCURATE
QUESTIONS WITH CORRECT
DETAILED SOLUTIONS | NEWEST
VERSION
Description: This comprehensive revision set contains 200 multiple-choice questions
covering the entire FRM Part II curriculum. Each question is followed by the correct
answer marked with ✅ and a detailed solution to reinforce understanding. Keywords
are bolded for quick recall. Answers are intentionally mixed (not aligned to a single
letter) to simulate the real exam.
Keywords: FRM Part II, Market Risk, Credit Risk, Operational Risk, Liquidity Risk,
Investment Management, Current Issues, Basel III, VaR, Expected Shortfall, CVA, DVA,
PFE, LCR, NSFR, Stress Testing, Backtesting, Model Risk, Cybersecurity, Climate Risk,
Libor Transition, SOFR, CCP, Margin, Collateral, Securitization, SPV, CDO, CDS, Merton
Model, KMV, CreditMetrics, CreditRisk+, Operational Risk Capital, AMA, SMA, BIA, SA,
ICAAP, Recovery Rate, PD, LGD, EAD, CVA, DVA, FVA, MVA, KVA, XVA, etc.
SECTION 1: MARKET RISK (Questions 1–40)
Q1. Which of the following best describes Expected Shortfall (ES) compared to Value
at Risk (VaR)?
,A) ES is not a coherent risk measure
B) ES considers tail risk beyond the VaR threshold ✅
C) ES is always lower than VaR
D) ES cannot be backtested
Solution: ES (also called Conditional VaR) is the average loss beyond the VaR level, thus
captures tail risk. It is coherent and can be backtested.
Q2. A portfolio has a 1-day 99% VaR of $2 million. What does this imply?
A) The maximum loss over 1 day is $2 million
B) There is a 1% chance of losing more than $2 million in one day ✅
C) The average loss is $2 million
D) 99% of the time, losses exceed $2 million
Solution: VaR at 99% means 1% probability of exceeding that loss.
Q3. Which Basel Committee document introduced the Fundamental Review of the
Trading Book (FRTB)?
A) Basel I
B) Basel II
C) Basel III ✅
D) Basel IV
Solution: FRTB is part of Basel III reforms, published in 2016 and revised in 2019.
,Q4. In FRTB, the Standardised Approach (SA) uses which of the following for market
risk?
A) Internal models only
B) Sensitivities-based method ✅
C) Historical simulation
D) Monte Carlo simulation
Solution: FRTB SA uses sensitivities-based method, default risk charge, and residual risk
add-on.
Q5. Backtesting a VaR model at 99% confidence with 250 days of data. How many
exceptions are allowed before the model is considered red zone under Basel?
A) 0–4
B) 5–9
C) 10+ ✅
D) 15+
Solution: Basel traffic light: Green (0–4), Yellow (5–9), Red (10+).
Q6. Which of the following is a coherent risk measure?
A) VaR
B) Expected Shortfall ✅
C) Standard deviation
D) Beta
, Solution: ES satisfies monotonicity, sub-additivity, homogeneity, and translation
invariance. VaR does not satisfy sub-additivity.
Q7. GARCH(1,1) model is used for:
A) Estimating default probability
B) Modeling volatility clustering ✅
C) Pricing options
D) Credit scoring
Solution: GARCH models conditional variance and captures volatility clustering.
Q8. The volatility smile refers to:
A) Implied volatility varying with strike price ✅
B) Historical volatility increasing over time
C) Volatility being constant
D) Volatility decreasing with maturity
Solution: Volatility smile shows implied vol is higher for deep ITM/OTM options than
ATM.
Q9. Delta-normal VaR assumes:
A) Linear payoffs and normal returns ✅
B) Non-linear payoffs
