200+ Free FRM Part II Practice Questions

Pass your Financial Risk Manager Part II exam on the first try — instant access, no signup required.

✓ No registration✓ No credit card✓ No hidden fees✓ Start practicing immediately

52-58% Pass Rate

200+ Questions

100% Free

1 / 200

Question 1

Score: 0/0

Which of the following is the primary advantage of using historical simulation over parametric VaR for calculating market risk?

It assumes returns are normally distributed

It captures fat tails and non-linear relationships in the data

It requires less computational power

It provides more precise estimates for small sample sizes

to track

2026 Statistics

Key Facts: FRM Part II Exam

52-58%

Historical Pass Rate

GARP (higher than Part I)

80 Qs

Exam Questions

4-hour CBT exam

200+ hrs

Recommended Study

GARP

80,000+

FRM Holders

Worldwide, GARP 2025

4 years

Window to Complete

After passing Part I

2 yrs

Experience Required

After passing both parts

The FRM Part II exam has a 52-58% pass rate, higher than Part I because candidates are better prepared. The 80-question exam covers six areas: Market Risk (20%), Credit Risk (20%), Operational Risk (20%), Liquidity Risk (15%), Investment Risk (15%), and Current Issues (10%). Candidates must complete Part II within 4 years of passing Part I. Combined with 2 years of work experience, this earns the FRM designation held by 80,000+ professionals worldwide.

Sample FRM Part II Practice Questions

Try these sample questions to test your FRM Part II exam readiness. Each question includes a detailed explanation. Start the interactive quiz above for the full 200+ question experience with AI tutoring.

1Which of the following is the primary advantage of using historical simulation over parametric VaR for calculating market risk?

A.It assumes returns are normally distributed

B.It captures fat tails and non-linear relationships in the data

C.It requires less computational power

D.It provides more precise estimates for small sample sizes

Explanation: Historical simulation is a non-parametric approach that uses actual historical returns to estimate potential losses. Its key advantage is that it captures fat tails, skewness, and non-linear relationships (like those in options) without making distributional assumptions. It does not assume normal distribution (A is wrong), typically requires more computational power (C is wrong), and may be less precise for small samples (D is wrong).

2A bank uses a delta-normal VaR model to estimate the risk of an option portfolio. During a market crash, the VaR estimate significantly underestimated actual losses. What is the most likely cause of this underestimation?

A.The portfolio was perfectly hedged

B.The delta-normal approach does not account for gamma (convexity) effects

C.The confidence level was set too high

D.The time horizon was too short

Explanation: The delta-normal VaR model uses only the first-order sensitivity (delta) to price changes. During extreme market movements, the second-order gamma effects (convexity) become significant, especially for options. This causes the linear approximation to break down, leading to significant underestimation of losses during crashes.

3Which VaR method is most appropriate for a portfolio containing complex exotic options that exhibit significant gamma and vega risk?

A.Delta-normal VaR

B.Historical simulation

C.Monte Carlo simulation with full revaluation

D.Parametric VaR using EWMA volatility

Explanation: Monte Carlo simulation with full revaluation is most appropriate for complex exotic options. It generates random price paths and fully revalues the option at each simulation step, properly capturing all Greeks (delta, gamma, vega, theta). Delta-normal (A) misses gamma effects. Historical simulation (B) may not capture all risk factors. EWMA (D) is for volatility estimation, not the method itself.

4A risk manager uses the square root rule to scale a 1-day VaR of $1 million to a 10-day VaR of $3.16 million. What assumption is this approach making?

A.Returns are serially correlated

B.Returns are independently and identically distributed (i.i.d.)

C.Volatility increases with the square root of time

D.Returns follow a fat-tailed distribution

Explanation: The square root rule (multiplying by √T) assumes returns are independently and identically distributed (i.i.d.). This means returns have no serial correlation and volatility scales with the square root of time. If returns were correlated (A), volatility would scale differently. The rule actually assumes constant volatility, not increasing (C). Fat tails (D) would violate i.i.d. assumptions.

5What is a key disadvantage of historical simulation VaR compared to parametric VaR?

A.It cannot handle non-linear instruments

B.It is highly dependent on the choice of historical window

C.It assumes normal distribution of returns

D.It requires estimation of correlation matrices

Explanation: Historical simulation is highly dependent on the choice of historical window. If the window includes a crisis period, VaR will be high; if it excludes recent turbulent periods, VaR may be too low. Historical simulation CAN handle non-linear instruments (A is wrong), does NOT assume normal distribution (C is wrong), and does NOT require correlation matrices (D is wrong).

6A portfolio manager estimates 95% VaR using 1,000 historical observations. How many observations fall in the tail used for the VaR calculation?

A.5 observations

B.50 observations

C.95 observations

D.500 observations

Explanation: For 95% VaR, 5% of observations are in the tail. With 1,000 observations: 0.05 × 1,000 = 50 observations fall in the tail. The VaR is typically estimated as the loss at the threshold of these 50 worst observations (or the 51st worst observation depending on interpolation method).

7In stressed VaR calculations, which time period does Basel III require banks to use as a reference for stress testing?

A.The 2008-2009 financial crisis period

B.A period of significant financial stress relevant to the bank's portfolio

C.The most recent 12-month period

D.The period of highest volatility in the past 5 years

Explanation: Basel III requires banks to identify a period of significant financial stress relevant to their specific portfolio, not just a generic crisis period. While the 2008-2009 crisis (A) is commonly used, banks must select a stress period that reflects risks in their actual positions. The choice depends on the bank's trading activities and risk factors.

8A risk manager observes that the empirical distribution of portfolio returns has fatter tails than a normal distribution. Which risk measure would be most appropriate to supplement VaR?

A.Standard deviation

B.Expected Shortfall (ES)

C.Beta

D.Sharpe ratio

Explanation: Expected Shortfall (ES), also known as Conditional VaR (CVaR), measures the average loss beyond the VaR threshold. Unlike VaR, which only looks at a single point, ES captures the magnitude of tail losses and is more sensitive to fat tails. It's the preferred supplement when tail risk is a concern.

9Which of the following best describes the "ghost effect" in filtered historical simulation?

A.The tendency for historical data to become irrelevant over time

B.The phenomenon where extreme returns from the past create spikes in VaR even when current volatility is low

C.The correlation between historical and simulated returns disappears

D.The model fails to capture regime changes in volatility

Explanation: The "ghost effect" occurs in filtered historical simulation when extreme returns from the past (scaled by current volatility) create spikes in VaR estimates, even when current market conditions are calm. This happens because extreme historical returns, when adjusted by current GARCH volatility, can produce artificially large VaR figures that may not reflect true current risk.

10A bank uses Monte Carlo simulation with 10,000 paths to calculate VaR. To improve the precision of the VaR estimate at the 99% confidence level, what is the most effective approach?

A.Increase the number of paths to 100,000

B.Use importance sampling to focus simulations on the tail region

C.Reduce the time horizon from 10 days to 1 day

D.Switch to historical simulation

Explanation: Importance sampling is a variance reduction technique that focuses computational effort on the tail region of the distribution - exactly where VaR estimates are made. For 99% VaR, only 1% of standard simulations fall in the tail, making estimates noisy. Importance sampling generates more scenarios in the tail region, dramatically improving precision without requiring exponentially more simulations.

About the FRM Part II Exam

The FRM Part II exam is the second of two exams required to earn the Financial Risk Manager certification from GARP. It tests knowledge of market risk measurement and management, credit risk measurement and management, operational risk and resiliency, liquidity and treasury risk measurement and management, risk management and investment management, and current issues in financial markets.

Questions

80 scored questions

Time Limit

4 hours

Passing Score

~50% (scaled)

Exam Fee

$600-800 (exam) (GARP)

FRM Part II Exam Content Outline

20%

Market Risk Measurement and Management

VaR methods, non-parametric approaches, volatility smiles, correlation risk, interest rate risk, stress testing, liquidity risk, model risk

20%

Credit Risk Measurement and Management

Credit risk fundamentals, default probability, counterparty risk, CVA, securitization, credit derivatives, portfolio models, stress testing

20%

Operational Risk and Resiliency

Operational risk framework, measurement, AMA, cyber risk, resiliency, third-party risk, conduct risk, model governance

15%

Liquidity and Treasury Risk

Funding risk, asset-liability management, stress testing, intraday liquidity, collateral, reserves, balance sheet management

15%

Risk Management and Investment Management

Factor theory, risk budgeting, hedge funds, private equity, risk monitoring, portfolio construction, performance evaluation, behavioral finance

10%

Current Issues in Financial Markets

AI/ML in finance, FinTech, climate risk, cryptocurrency, IBOR transition, pandemic risk, regulatory developments

How to Pass the FRM Part II Exam

What You Need to Know

Passing score: ~50% (scaled)
Exam length: 80 questions
Time limit: 4 hours
Exam fee: $600-800 (exam)

Keys to Passing

Complete 500+ practice questions
Score 80%+ consistently before scheduling
Focus on highest-weighted sections
Use our AI tutor for tough concepts

FRM Part II Study Tips from Top Performers

1Master VaR methods: parametric, historical simulation, Monte Carlo, and their extensions (CVaR, stressed VaR)

2Understand counterparty credit risk: exposure measures, CVA, collateral, and central clearing

3Study credit derivatives thoroughly: CDS, CDS indices, tranches, and total return swaps

4Know operational risk frameworks: Basel approaches, AMA, SMA, and scenario analysis

5Practice liquidity risk calculations: LCR, NSFR, survival horizons, and liquidity gap analysis

6Review hedge fund strategies and risk measures: Sharpe, Sortino, Information Ratio, maximum drawdown

7Read Current Issues materials early — these readings change annually and test current knowledge

8Take full 4-hour practice exams to build stamina for the actual exam

Frequently Asked Questions

What is the FRM Part II pass rate?

The FRM Part II pass rate historically averages 52-58%, higher than Part I (42-47%) because candidates who reach Part II have stronger preparation and understanding of risk management concepts. The 2025 pass rate was approximately 55%. The exam remains challenging with complex quantitative and conceptual questions across six topic areas.

What is the format of the FRM Part II exam?

The FRM Part II exam consists of 80 multiple-choice questions administered over 4 hours via computer-based testing (CBT). Unlike Part I, Part II questions are weighted by topic area according to the syllabus percentages: Market Risk (20%), Credit Risk (20%), Operational Risk (20%), Liquidity Risk (15%), Investment Management (15%), and Current Issues (10%).

How long do I have to pass FRM Part II after Part I?

You have 4 years from passing Part I to pass Part II. If you do not pass Part II within this window, your Part I result expires and you must retake both exams. There is no limit on the number of attempts within the 4-year window. Once both parts are passed, you need 2 years of relevant risk management work experience to earn the FRM designation.

How much does FRM Part II cost?

The FRM Part II exam fee is $600 for early registration or $800 for standard registration. There is no additional enrollment fee for Part II (the $400 enrollment fee is paid only once when registering for Part I). If you need to retake Part II, you pay the exam fee again. GARP membership is optional and not required for the certification.

How long should I study for FRM Part II?

GARP recommends 200+ hours of study for Part II. Most successful candidates study 3-5 months, focusing on practice questions and mock exams. Part II is more conceptual than Part I, with greater emphasis on application and case studies. The Current Issues section (10%) requires reading contemporary risk management topics that change annually.

What is the hardest part of FRM Part II?

Many candidates find Credit Risk (20%) and Operational Risk (20%) most challenging due to the breadth of topics and specialized knowledge required. The CVA (Credit Valuation Adjustment) calculations, securitization structures, and operational risk capital models are particularly complex. Current Issues (10%) can also be challenging because the readings change annually and may not have extensive practice materials available.