Free GARP FRM Part I Foundations of Risk Management Practice Questions
Practice 276 free Foundations of Risk Management questions for GARP FRM Part I.
276 Questions
85 Easy
133 Medium
58 Hard
2026 Syllabus
Sample Questions
Question 1
Easy
How does the Sortino ratio differ from the Sharpe ratio?
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Correct Answer: C
Solution
C is correct. The Sortino ratio penalizes only downside volatility. It divides the excess return above a minimum acceptable return by the downside deviation (the standard deviation of returns below the threshold), whereas the Sharpe ratio uses total standard deviation.
Question 2
Medium
The failure of Northern Rock in 2007 most directly illustrates which type of risk?
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Correct Answer: C
Solution
C is correct. Northern Rock funded a large book of mortgages heavily through short-term wholesale borrowing and securitization rather than stable retail deposits. When the interbank and securitization markets seized up in 2007, it could not roll its short-term funding, triggering a liquidity crisis and ultimately a retail deposit run. The lesson is the danger of a maturity mismatch that depends on continuous access to wholesale funding.
Question 3
Hard
The 2012 JPMorgan "London Whale" episode is most instructive as a warning about which combination of failures?
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Correct Answer: B
Solution
B is correct. The Chief Investment Office accumulated a large, concentrated synthetic credit-derivatives position while a newly implemented VaR model understated the risk, and valuation and control weaknesses allowed losses to accumulate before they were recognized. Unlike Barings, the traders acted within delegated authority; the failure was model risk plus inadequate independent oversight and position-limit discipline.
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