Free GARP FRM Part II Risk and Investment Management Practice Questions
Risk Management and Investment Management carries 15% of GARP FRM Part II (GARP). Questions cover factor theory and the low-risk anomaly, portfolio construction and analytical portfolio risk, VaR and risk budgeting in investment management, performance evaluation, hedge fund strategies, private markets investing, due diligence on managers and funds (including the Madoff red flags), plausible scenario construction, and liquidity risk in illiquid assets.
197 questions68 easy76 medium53 hard2026 syllabus
Sample Questions
Question 1
Easy
Under Basel III, the Liquidity Coverage Ratio (LCR) is INTENDED to ensure that a bank:
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Correct Answer: B
Solution
B is correct. The LCR is a short-term liquidity standard requiring a bank's stock of unencumbered high-quality liquid assets (HQLA) to be at least equal to its projected net cash outflows over a 30 calendar-day period of significant liquidity stress (LCR ≥ 100%). It is designed to ensure short-term resilience by forcing banks to hold a buffer of assets that can be readily converted into cash with little or no loss of value during a defined stress scenario.
Question 2
Medium
A 200M USD portfolio has a 1-day 95% VaR of 10M USD. Asset X represents a 40M USD position with a marginal VaR of 0.06 (per dollar of position). What is the component VaR of Asset X?
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Correct Answer: B
Solution
B is correct. Component VaR equals the marginal VaR multiplied by the dollar position size: Component VaRX=MVaRX×PositionX=0.06×40M=2.4M Component VaRs sum to total portfolio VaR, so Asset X contributes 24% of the 10M USD total.
Question 3
Hard
A bank risk team is constructing a market-driven scenario for a sudden flight-to-quality episode triggered by a sovereign-credit shock. Following best practice for plausible scenario construction, which of the following sequencing choices is MOST APPROPRIATE?
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Correct Answer: C
Solution
C is correct. Plausible market-driven scenarios are built by first defining the trigger event and the core (primary) risk factors that move directly with it, then propagating the shock to secondary risk factors using empirically observed conditional co-movements from historical analogs (supplemented by expert judgment where data are sparse). This produces an internally coherent scenario whose factor moves are economically linked, rather than a mechanical or arbitrary stress.
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