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 Merton model is different from Moody’s-KMV Expected Default Frequency approach in two key areas. Which of the following statements refers to one of those differences?

A : The Merton model factors the market value of the borrower’s equity, while Moody’s-KMV model uses book value.

B : The Merton model uses the risk-free rate to calculate the distance to default, while Moody’s-KMV model uses a customized value.

C : Moody’s-KMV model uses a default point with short-term debt and half of long term debt, while the Merton model only uses short-term debt.

D : The Merton model uses historical data to derive a distribution of default frequencies, while Moody’s-KMV model uses standardized expectations.

Answer: C

Question 2

Which of the following statements describes the best approach for liquidity transfer pricing?

A : The matched-maturity marginal approach is preferred because it quantifies liquidity risk premiums across all maturities.

B : The separate average cost of funds approach is preferred to accurately account for business units with large trading activities.

C : The pooled average cost of funds approach is more appropriate for banks with numerous business units.

D : Zero cost of funds approach is preferred in cases in which swap rates are unknown and undeterminable.

Answer: A

Question 3

A newly hired risk analyst at a large investment bank is examining how financial correlation risk affects the bank’s portfolios. The bank holds portfolios consisting of different types of assets and enters into various hedging contracts with multiple counterparties. Which of the following statements would the analyst be correct to make?

A : The buyer of a CDS faces wrong-way risk when there is a positive default correlation between the reference asset and the CDS counterparty.

B : The risk-adjusted return of a portfolio typically increases when correlations of assets in the portfolio increase.

C : Correlation risk is highest during periods of relatively benign market movements when correlations are difficult to predict.

D : Dynamic correlation risk in a portfolio of pairs trades is most appropriately estimated using Gaussian copulas.

Answer: A

Question 4

A portfolio consists of two positions. The VaR of the two positions are $10 million and $20 million. If the returns of the two positions are not correlated, the VaR of the portfolio would be closest to:

A : $15.00 million

B : $22.36 million.

C : $25.00 million.

D : $5.48 million.

Answer: B

Question 5

A model validation team at a bank is backtesting the bank’s VaR model. Inpreparation for the backtest, one of the team members expresses a concern that thevalidation process could result in the team committing a Type I error or a Type IIerror and discusses the characteristics of these errors with the team. Which of thefollowing is correct regarding Type I and Type II errors?

A : D A Type II error is committed when a correctly specified model is rejected.

B : committing a Type II error regardless of the probability of committing a Type I error.

C : C A Type I error is committed when an incorrectly specified model is accepted.

D : increases and the level of significance is held constant.

Answer: D

Page: 1 / 101

Total 503 Questions | Updated On: Jan 13, 2026

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