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: Jan 13, 2026

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Question 1

The structural model of credit risk is most likely a(n):

A : heterogenous model.

B : dynamic model.

C : random recovery rate model.

D : implied copula model.

Answer: B

Question 2

If one of the entities in the CDX NA IG index defaults, the CDS index would most likely:

A : continue with 124 entities, and the notional principal of each entity would remain the same.

B : continue with a replacement entity, with no change to the notional principal.

C : continue with 99 entities, and the notional principal of each entity would be reduced by 1%.

D : make a payoff and be discontinued.

Answer: A

Question 3

The head of the fixed-income department of a bank asks a risk analyst to review anoutstanding bond issued by Company GRN, a livestock producer. The bondcurrently trades at a spread of 250 bps over the risk-free interest rate and has arecovery rate of 75%. Senior management of the bank has expressed concernabout the slowdown in business activities in the livestock industry, which isexpected to last for the next 3 years. The analyst applies the constant hazard rateprocess in estimating default probability and assumes that, under a stressed marketscenario, the bond would trade at a spread of 480 bps over the risk-free interest ratecurve, and its recovery rate would decrease to 40%. Assuming the stress scenarioprevails, what would be the correct estimate of the probability that Company GRNwould not default on its bond over the next 3 years?

A : D 74.1%

B : A 69.8%

C : C 86.6%

D : B 78.7%

Answer: D

Question 4

A risk analyst is evaluating an investment portfolio using the Fama-French threefactormodel. The analyst regresses thirty years of weekly portfolio returns againstthe three factors of the model. The analyst obtains the following regression results:Alpha 0.10Market coefficient 0.52SMB coefficient 0.18HML coefficient -0.70Assuming all estimated coefficients are statistically significant, which of the following is correct?

A : indicates that the portfolio moves together with large-cap stocks.

B : indicates that the portfolio moves together with growth stocks.

C : indicates that the portfolio moves together with growth stocks.

Answer: C

Question 5

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

Page: 1 / 101

Total 503 Questions | Updated On: Jan 13, 2026

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