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Free Questions › FRM › Quantitative Analysis
Free FRM Quantitative Analysis Practice Questions & Answers
400 exam-style Quantitative Analysis questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 91
Reputational risk is:
Select an option first.
Correct answer: B — The risk of damage to a firm's reputation that may reduce revenues, increase costs of funding, or trigger regulatory action
Explanation: B
Question 92
Model validation is important because:
Select an option first.
Correct answer: B — Models can contain specification errors, estimation errors, or implementation bugs that lead to systematic mispricing or risk underestimation
Explanation: B
Question 93
Risk governance refers to:
Select an option first.
Correct answer: B — The structures, processes, and culture through which an organisation identifies, measures, monitors, and controls risks — including board oversight, risk appetite frameworks, and three lines of defence
Explanation: B
Question 94
The bid-ask spread in financial markets represents:
Select an option first.
Correct answer: B — The transaction cost in market making — the difference between the price at which a dealer buys (bid) and sells (ask), which widens under stress and contributes to market liquidity risk
Explanation: B
Question 95
The risk-free rate in financial models represents:
Select an option first.
Correct answer: B — The theoretical return of an investment with zero default risk, typically approximated by short-term government treasury yields
Explanation: B
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Question 96
Concentration risk refers to:
Select an option first.
Correct answer: B — Having excessive exposure to a single counterparty, sector, geography, or risk factor — a portfolio that is not well-diversified and may suffer catastrophic losses from a single adverse event
Explanation: B
Question 97
Diversification reduces risk because:
Select an option first.
Correct answer: B — Combining assets with low or negative correlations reduces portfolio variance below the weighted average of individual variances
Explanation: B
Question 98
Risk-adjusted return on capital (RAROC) is calculated as:
Select an option first.
Correct answer: B — Expected return divided by economic capital
Explanation: B
Question 99
Economic capital differs from regulatory capital in that:
Select an option first.
Correct answer: B — Economic capital is the internally estimated capital needed to absorb unexpected losses at a chosen confidence level, while regulatory capital is the minimum required by supervisors
Explanation: B
Question 100
The historical simulation approach to VaR:
Select an option first.
Correct answer: B — Uses actual historical return observations to construct the empirical distribution and then reads off the quantile
Explanation: B
Question 101
Stress testing complements VaR by:
Select an option first.
Correct answer: B — Examining the impact of extreme but plausible scenarios that may lie beyond the VaR confidence level
Explanation: B
Question 102
Backtesting a VaR model involves:
Select an option first.
Correct answer: A — Comparing VaR estimates with actual losses to check model accuracy
Explanation: A
Question 103
The Net Stable Funding Ratio (NSFR) under Basel III requires:
Select an option first.
Correct answer: B — Available Stable Funding (ASF) to exceed Required Stable Funding (RSF) over a one-year horizon, addressing structural liquidity risk
Explanation: B
Question 104
Regulatory capital under Basel III consists of:
Select an option first.
Correct answer: B — CET1 capital (highest quality), Additional Tier 1 (AT1), and Tier 2 capital, with CET1 being the primary focus
Explanation: B
Question 105
Operational risk losses are categorised under Basel by event type. Which of the following is an internal fraud loss?
Select an option first.
Correct answer: C — A rogue trader booking fictitious trades to hide losses
Explanation: C
Question 106
A bank uses a one-factor credit risk model where correlation between borrowers is driven by:
Select an option first.
Correct answer: B — A single systematic factor (e.g., the state of the economy) affecting all borrowers, with each borrower also having idiosyncratic risk
Explanation: B
Question 107
The three pillars of the Basel regulatory framework are:
Select an option first.
Correct answer: B — Minimum capital requirements (Pillar 1), Supervisory review process (Pillar 2), and Market discipline through disclosure (Pillar 3)
Explanation: B
Question 108
The risk-return trade-off principle states that:
Select an option first.
Correct answer: B — Investors require higher expected returns to compensate for bearing higher risk, creating the risk premium
Explanation: B
Question 109
Enterprise risk management (ERM) classifies risks into categories for comprehensive coverage. Which classification is most complete?
Select an option first.
Correct answer: B — Financial risks (market, credit, liquidity), non-financial risks (operational, strategic, reputational), and external/environmental risks — collectively covering all material risk types
Explanation: B
Question 110
The fundamental law of active management (Grinold) states that the information ratio is approximately:
Select an option first.
Correct answer: B — IR ≈ IC × √BR where IC is the information coefficient (correlation between forecasted and actual returns) and BR is the breadth (number of independent forecasts per year)
Explanation: B
Question 111
Stress testing under the CCAR (Comprehensive Capital Analysis and Review) framework in the US:
Select an option first.
Correct answer: B — Requires large US banks to project capital ratios under Federal Reserve-specified severely adverse macroeconomic scenarios (GDP decline, unemployment spike, equity crash) over nine quarters to assess capital adequacy and dividend/buyback capacity
Explanation: B
Question 112
Tail dependence between two random variables X and Y measures:
Select an option first.
Correct answer: B — The probability that Y is in its extreme tail given X is in its extreme tail — crucial for understanding joint losses in financial crises when correlations spike
Explanation: B
Question 113
The economic capital framework at a bank:
Select an option first.
Correct answer: B — Estimates the capital needed to absorb unexpected losses across all risk types at a chosen confidence level (e.g., 99.97%) consistent with the bank's target credit rating (e.g., AA requires very high confidence), supporting RAROC-based business performance evaluation
Explanation: B
Question 114
Risk appetite vs risk capacity:
Select an option first.
Correct answer: B — Risk appetite is the amount of risk an organisation CHOOSES to take; risk capacity is the maximum risk it CAN take before facing catastrophic consequences (insolvency, regulatory breach). Risk appetite ≤ risk capacity.
Explanation: B
Question 115
The risk management function's primary role relative to business units is:
Select an option first.
Correct answer: B — To provide independent oversight, measurement, and monitoring of risk, ensuring that risk-taking is consistent with the firm's risk appetite and that decision-makers have accurate risk information
Explanation: B
Question 116
The concept of risk decomposition in portfolio management allows:
Select an option first.
Correct answer: B — Attribution of total portfolio risk to individual positions, risk factors, or business lines — enabling identification of risk concentrations, efficient capital allocation, and targeted hedging
Explanation: B
Question 117
The Basel III liquidity coverage ratio (LCR) requires banks to:
Select an option first.
Correct answer: B — Hold a buffer of High Quality Liquid Assets (HQLA) to cover at least 100% of net cash outflows over a 30-day stress period
Explanation: B
Question 118
Under the Fundamental Review of the Trading Book (FRTB), the key changes to internal model approval include:
Select an option first.
Correct answer: B — Moving to desk-level model approval with P&L attribution tests and backtesting requirements, and replacing VaR with Expected Shortfall
Explanation: B
Question 119
Enterprise Risk Management (ERM) integrates all risk types across an organization to:
Select an option first.
Correct answer: B — Provide a holistic view of all risks, enabling portfolio-level risk management, risk aggregation, and alignment of risk-taking with strategic objectives and risk appetite
Explanation: B
Question 120
Procyclicality in risk models occurs when:
Select an option first.
Correct answer: B — Risk estimates increase in downturns and decrease in booms — when estimated risk is low during good times (leading to excess risk-taking) and spikes during bad times (forcing deleveraging), amplifying the financial cycle
Explanation: B
More free FRM topics
Foundations of Risk Management400
Financial Markets and Products400
Valuation and Risk Models400
Market Risk Measurement and Management400
Credit Risk Measurement and Management400
Operational Risk and Resilience400
Liquidity and Treasury Risk Management400
Risk Management & Investment Management398
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