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100+ Free Enterprise Risk Management (ERM) Practice Questions

Prepare for the Enterprise Risk Management (ERM) — Actuaries Institute Fellowship Program exam with instant access — no signup required.

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2026 Statistics

Key Facts: Enterprise Risk Management (ERM) Exam

3 hours

Exam Duration

Actuaries Institute

$3,800 AUD

2026 Subject Fee

Actuaries Institute Fee Schedule

8

Learning-objective groups (no weights published)

ERM 2026 Subject Syllabus

CERA

Global Alignment

CERA Global Treaty

100

Practice Questions

OpenExamPrep

Enterprise Risk Management (ERM) is one of seven Principles subjects in the Actuaries Institute Fellowship Program and an approved CERA pathway, offered in Semester 1 and delivered 100% online over a 16-week semester. It is assessed by an open-book written examination of three hours plus 15 minutes reading time worth 80% and an assignment worth 20%, with a 2026 subject fee of $3,800 AUD; no item count and no pass mark are published. The syllabus publishes an assessment skill-level split of Simple Application 25%, Application 50% and Higher Order 25%, but does not publish topic weightings — it sets out eight learning-objective groups instead. These 100 free questions are an English-language multiple-choice study adaptation of that syllabus, not an official item bank and not a simulation of the real written-answer paper.

Sample Enterprise Risk Management (ERM) Practice Questions

Try these sample questions to test your Enterprise Risk Management (ERM) exam readiness. Each question includes a detailed explanation. Start the interactive quiz above for the full 100+ question experience with AI tutoring.

1In enterprise risk management, which of the following best describes the primary function of the 'Second Line of Defence' under the Three Lines of Defence governance model?
A.Providing independent oversight, establishing risk management frameworks, and monitoring adherence to risk limits
B.Direct day-to-day operational ownership and management of business risks and controls
C.Delivering objective, independent assurance on the effectiveness of governance and internal controls directly to the Board Audit Committee
D.Setting the overall commercial strategy and executing customer transactions within business units
Explanation: The Second Line of Defence comprises specialist risk management and compliance functions. Its role is to establish policies, design enterprise frameworks, provide independent challenge to operational management, and monitor risk profile adherence against approved tolerances.
2Under APRA Prudential Standard CPS 220 (Risk Management), what is the primary statutory responsibility of the Board of an APRA-regulated institution regarding risk appetite?
A.Establishing and maintaining an approved Risk Appetite Statement (RAS) that articulates the degree of risk the institution is willing to accept
B.Delegating full authority for risk limit setting and policy exceptions to the Chief Risk Officer without Board oversight
C.Relying exclusively on external statutory auditors to define acceptable financial loss thresholds
D.Formulating day-to-day tactical underwriting guidelines for individual retail branches
Explanation: APRA CPS 220 mandates that the Board is ultimately responsible for the institution's risk management. The Board must establish, approve, and regularly review a comprehensive Risk Appetite Statement (RAS) that specifies quantitative limits and qualitative boundaries across all material risks.
3Which of the following mathematical properties is REQUIRED for a risk measure ρ(X) to be classified as a 'coherent risk measure' under the Artzner et al. (1999) axioms?
A.Subadditivity: ρ(X + Y) ≤ ρ(X) + ρ(Y)
B.Strict superadditivity: ρ(X + Y) > ρ(X) + ρ(Y)
C.Quadratic scaling: ρ(λX) = λ² ρ(X) for all λ > 0
D.Invariance under non-linear monotone transformations: ρ(g(X)) = g(ρ(X))
Explanation: A coherent risk measure must satisfy four key axioms: translation invariance, subadditivity, positive homogeneity, and monotonicity. Subadditivity ensures that portfolio diversification reduces or leaves unchanged the total risk capital required.
4Why is standard Value at Risk (VaR) at confidence level α NOT a coherent risk measure in the general case?
A.It fails the subadditivity axiom for non-elliptical loss distributions with heavy tails
B.It violates positive homogeneity when portfolio sizes are scaled by a constant factor
C.It fails monotonicity when losses are strictly non-negative
D.It cannot be computed for normally distributed financial asset returns
Explanation: Standard VaR fails the subadditivity axiom when applied to skewed, fat-tailed, or discrete loss distributions. Merging two independent portfolios with extreme tail risk can result in a combined VaR greater than the sum of the individual VaRs.
5An actuary models portfolio losses using Tail Value at Risk (TVaR), also known as Expected Shortfall (ES), at confidence level α = 99%. By definition, TVaR_0.99(L) represents:
A.The conditional expected loss given that the loss exceeds the 99th percentile Value at Risk: E[L | L > VaR_0.99(L)]
B.The maximum possible loss that can occur with exactly 1% probability in a one-year time horizon
C.The median loss across the entire probability distribution of asset returns
D.The standard deviation of losses multiplied by the 99th percentile standard normal quantile
Explanation: Tail Value at Risk (TVaR / Expected Shortfall) measures the expected value of losses in the tail conditional on the loss exceeding the Value at Risk threshold at level α. For continuous distributions, TVaR_α(L) = E[L | L > VaR_α(L)]. Unlike VaR, TVaR is always coherent.
6A financial institution holds a loan portfolio with potential losses L uniformly distributed on the interval [AUD 0, AUD 10,000,000]. What is the 95% Tail Value at Risk (TVaR_0.95) of this portfolio?
A.AUD 9,750,000
B.AUD 9,500,000
C.AUD 9,000,000
D.AUD 10,000,000
Explanation: For a uniform distribution on [0, B], the quantile is VaR_α = α × B. At α = 0.95, VaR_0.95 = 0.95 × AUD 10,000,000 = AUD 9,500,000. Because the tail is uniformly distributed between VaR_0.95 and B, the conditional expectation is the midpoint: TVaR_0.95 = (VaR_0.95 + B) / 2 = (AUD 9,500,000 + AUD 10,000,000) / 2 = AUD 9,750,000.
7Under APRA Prudential Standard CPS 230 Operational Risk Management, in force since 1 July 2025, which of the following is an APRA-regulated entity required to establish for its critical operations?
A.Tolerance levels for operational disruptions, covering maximum tolerable downtime, data loss, and service degradation
B.A complete ban on outsourcing any material business activity to third-party technology vendors
C.A static capital charge equal to 25% of total gross operational revenue without risk assessment
D.Mandatory dual execution of all financial transactions across physically separated manual teams
Explanation: APRA CPS 230 mandates that entities identify critical operations, set tolerance levels for disruptions (including maximum tolerable downtime, data loss, and impacts on customers and financial stability), and maintain robust service provider risk management.
8In extreme value theory (EVT), the Pickands-Balkema-de Haan theorem states that for a broad class of underlying distributions, the distribution of excess losses over a sufficiently high threshold u converges asymptotically to a:
A.Generalized Pareto Distribution (GPD)
B.Log-normal Distribution
C.Student's t-distribution with 2 degrees of freedom
D.Standard Gaussian Normal Distribution
Explanation: The Pickands-Balkema-de Haan theorem is foundational to EVT peaks-over-threshold (POT) modeling. It establishes that the conditional distribution of excesses over a high threshold u converges to a Generalized Pareto Distribution (GPD), defined by scale parameter σ and shape/tail parameter ξ.
9When modeling multivariate tail risk using copulas, which copula exhibits asymmetric LOWER tail dependence while having zero upper tail dependence?
A.Clayton copula
B.Gumbel copula
C.Gaussian (Normal) copula
D.Frank copula
Explanation: The Clayton copula has positive lower tail dependence (λ_L = 2^(-1/θ)) and zero upper tail dependence (λ_U = 0) for parameter θ > 0. This makes it suitable for modeling simultaneous asset crashes or joint severe negative returns.
10A financial conglomerate calculates the standalone 99.5% 1-year economic capital for its two business units: Unit A requires AUD 400M and Unit B requires AUD 300M. If the loss correlation between the units is ρ = 0.60 and losses are modeled using an elliptical distribution, what is the diversified total economic capital?
A.AUD 627.69M
B.AUD 700.00M
C.AUD 500.00M
D.AUD 420.00M
Explanation: Under an elliptical distribution, the aggregated capital is calculated using the variance-covariance formula: Total EC = sqrt(EC_A^2 + EC_B^2 + 2 × ρ × EC_A × EC_B) = sqrt(400^2 + 300^2 + 2 × 0.60 × 400 × 300) = sqrt(160,000 + 90,000 + 144,000) = sqrt(394,000) ≈ AUD 627.69M. The diversification benefit is AUD 700M − AUD 627.69M = AUD 72.31M.

About the Enterprise Risk Management (ERM) Exam

Enterprise Risk Management (ERM) is a Principles subject in the Actuaries Institute Fellowship Program and an approved pathway to the CERA credential. Its syllabus, level of assessment and required skill level are adopted from the Global Syllabus for the Chartered Enterprise Risk Actuary, so the subject is deliberately principles-based and transferable across industries and geographies rather than tied to any single jurisdiction's prudential rulebook.

Assessment

Open-book written examination (3 hours plus 15 minutes reading time) worth 80% plus an assignment worth 20%, per the 2026 ERM subject syllabus. Assessment is delivered 100% online.

Time Limit

3 hours plus 15 minutes reading time

Passing Score

not-published

Exam Fee

$3,800 AUD (2026 Fellowship Program subject fee, GST exempt) (Actuaries Institute (Australia))

Enterprise Risk Management (ERM) Exam Content Outline

Not published

1. Fundamentals of Enterprise Risk Management

Describe the concept of ERM, its drivers and the resulting value to organisations; demonstrate the application of a risk control process; and describe effective risk communication for the target audience.

Not published

2. The internal environment supporting effective risk management

Recommend an appropriate ERM framework, evaluate the health of an organisation's risk culture, address governance issues such as agency, compliance and legal risk, evaluate the structure of a risk management function, and analyse ERM roles and responsibilities.

Not published

3. The external environment affecting organisations

Examine the impact of the external environment on an organisation's ability to achieve its objectives, and describe how an organisation can adapt to unforeseen changes in its risk environment.

Not published

4. Examining and categorising risks

Describe how individual risks might be categorised, identify specific risks faced by an organisation, detect emerging risks, and determine an appropriate monitoring mechanism for emerging risks.

Not published

5. Assessing risks

Determine the implications of risks on the balance sheet and income statement; describe the properties and limitations of common risk measures such as VaR and TVaR; demonstrate risk aggregation, scenario analysis, stress testing and low-frequency high-severity modelling; and analyse risks that are not easily quantifiable.

Not published

6. Decision-making under uncertainty

Articulate risk appetite and risk limits, determine how risks and opportunities influence strategy, embed ERM into strategic planning, assess risk-return trade-offs, apply avoidance, acceptance, reduction and transfer responses, and assess the effect of risk decisions on stakeholders.

Not published

7. Responding to and managing risk

Propose ERM solutions for real and hypothetical case situations, demonstrate the use of controls, derivatives, reinsurance and ALM to manage risk, apply techniques for managing non-financial risks, and manage the impact of significant events after they occur.

Not published

8. The use of capital by organisations

Demonstrate a conceptual understanding of economic measures of value and capital requirements (EVA, embedded value, economic capital, regulatory and accounting measures), develop a capital model, apply VaR and TVaR in capital assessment, allocate aggregated risk, and attribute the cost of risk capital to business units.

How to Pass the Enterprise Risk Management (ERM) Exam

What You Need to Know

  • Passing score: not-published
  • Assessment: Open-book written examination (3 hours plus 15 minutes reading time) worth 80% plus an assignment worth 20%, per the 2026 ERM subject syllabus. Assessment is delivered 100% online.
  • Time limit: 3 hours plus 15 minutes reading time
  • Exam fee: $3,800 AUD (2026 Fellowship Program subject fee, GST exempt)

Keys to Passing

  • Work through all 100 available questions
  • Review every answer and explanation
  • Track weak areas and revisit them
  • Use our AI tutor for tough concepts

Enterprise Risk Management (ERM) Study Tips from Top Performers

1Master the distinction between VaR and Tail VaR (Expected Shortfall), focusing on mathematical properties of coherent risk measures such as subadditivity.
2The syllabus is CERA-aligned and principles-based. Learn the reasoning behind risk governance and capital requirements rather than memorising any single jurisdiction's prudential paragraph numbers.
3Practise copula selection (Gaussian, t-copula, Clayton, Gumbel) and know how tail dependence affects capital aggregation in extreme stress events.
4Learn to formulate clear Risk Appetite Statements (RAS) with quantitative tolerance limits and qualitative risk statements for board reporting.

Frequently Asked Questions

How is the ERM subject assessed?

The 2026 subject syllabus states ERM is assessed by an open-book written examination of three hours plus 15 minutes reading time worth 80% of the mark, and an assignment worth 20%. Assessment is split across skill levels of Simple Application 25%, Application 50% and Higher Order 25%.

Does this subject qualify for the CERA designation?

Yes. The Actuaries Institute ERM subject is fully aligned with the Global CERA Treaty syllabus. Passing this subject fulfills the specialist ERM requirement for the Chartered Enterprise Risk Actuary (CERA) credential.

Is ERM an Australian prudential-regulation subject?

Not primarily. The syllabus is adopted from the Global CERA Syllabus and is explicitly principles-based so the skills stay transferable across industries and geographies. Australian prudential standards such as CPS 220 Risk Management and CPS 230 Operational Risk Management are useful context for the governance and capital learning objectives, but they are not themselves the syllabus.

What is the fee for the ERM subject in 2026?

The 2026 Fellowship Program subject fee is $3,800 AUD, exempt from GST. Printed subject materials are optional at $270-$300 AUD and membership is charged separately.

Are these practice questions the same format as the official exam?

No. The official ERM paper uses long-form case studies and quantitative analysis requiring written answers. This bank is an English-language multiple-choice study adaptation of the official syllabus, built to drill the concepts, risk measures and judgement the paper assumes. It is not an official item bank and does not replace practising extended written answers.