Free GARP FRM Part I Valuation and Risk Models Practice Questions (2026)

Free GARP FRM Part I Valuation and Risk Models Practice Questions

Valuation and Risk Models carries 30% of GARP FRM Part I (GARP). Questions test VaR and expected shortfall, measuring and monitoring volatility, external and internal credit ratings, country risk, measuring credit and operational risk, stress testing, discounting and arbitrage, bond yields and returns, duration, convexity, and DV01, non-parallel term structure shifts, binomial trees, the Black-Scholes-Merton model, and the option Greeks.

320 questions 92 easy 130 medium 98 hard 2026 syllabus

Sample Questions

Question 1 Easy

Which of the following statements about Expected Shortfall (ES) is correct?

Solution

B is correct. Expected Shortfall is defined as the average loss in the tail beyond the VaR cutoff:

\text{ES}_\alpha = E[L \mid L > \text{VaR}_\alpha]

. It is sometimes called Conditional VaR or Average VaR. Because it averages over all tail outcomes, ES is a coherent (subadditive) risk measure, whereas VaR is not coherent in general.

Question 2 Medium

A bond's current yield is 4.8% and its yield to maturity is 5.2%. This bond is most likely trading:

Solution

A is correct.

Current yield = Annual coupon / Market price. YTM > Current yield implies the bond is priced below par (at a discount). When a bond trades at a discount, the capital gain from pulling to par at maturity adds to the coupon return, making YTM exceed current yield.

Question 3 Hard

A risk team has computed a 1-day 99% parametric VaR of $100,000 for a trading book. Assuming returns are i.i.d. and normally distributed, what is the corresponding 10-day 95% VaR?

Solution

B is correct. Two adjustments are required. First, scale the horizon using the square-root-of-time rule: multiply by

\sqrt{10} = 3.1623

. Second, change the quantile from 99%

(z = 2.326)

to 95%

(z = 1.645)

: multiply by

1.645/2.326 = 0.7073

. Combining, 10-day 95% VaR

= 100{,}000 \times 3.1623 \times 0.7073 \approx 223{,}600

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