FRM Part II practice questions with answers

1. 01

   Operational risk

   Question 1. Which of the following practices represents a sound methodological and governance standard for implementing a RAROC-based economic capital allocation framework across diverse business units?

   Answer to question 1

   AA. Dividing unadjusted accounting net income by risk-adjusted capital to establish the RAROC metric for each business unitBB. Tailoring the confidence level and time horizon to each unit's individual risk profile to determine standalone capital requirementsCC. Deducting expected losses from revenues in the numerator as an ongoing cost of doing business, while sizing allocated economic capital solely from unexpected losses at a uniform firm-wide confidence levelDD. Treating expected loss as part of allocated economic capital in the denominator, while benchmarking the resulting return against the marginal cost of debt

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2. 02

   Liquidity risk

   Question 2. Under a sound intraday liquidity governance framework, if an unexpected midday client outflow is projected to breach an established intraday peak net debit limit, Corporate Treasury should

   Answer to question 2

   AA. mobilize intraday collateral or sequence payment queues, and obtain formal approval from Independent Risk Management if a temporary limit extension is necessary.BB. unilaterally raise the intraday net debit cap to prevent settlement delays, provided that projected end-of-day balances remain fully compliant with regulatory requirements.CC. allow the breach to occur without intervention, provided that the bank maintains an end-of-day Liquidity Coverage Ratio well above minimum regulatory thresholds.DD. transfer the settlement responsibility and correspondent account management to the originating business unit desk.

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3. 03

   Credit risk

   Question 3. Which of the following is the 1-year Expected Loss (EL) that the independent credit risk assessment team should submit to the delegated credit approval committee for the upcoming credit renewal period, given a projected Exposure at Default (EAD) of USD 45,000,000 for the upcoming year (down from the prior year's opening facility limit of USD 60,000,000), an updated 1-year Probability of Default (PD) of 2.00%, and an assessed Loss Given Default (LGD) of 40.00%?

   Answer to question 3

   AA. USD 540,000BB. USD 480,000CC. USD 360,000DD. USD 270,000

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4. 04

   Investment management

   Question 4. In a standardized Due Diligence Questionnaire (DDQ) utilized for reviewing an external asset manager, which set of items is specifically evaluated under the risk management practices section?

   Answer to question 4

   AA. Ownership breakdown, key-person succession planning, and historical assets under management trendsBB. Research methodology, investable asset universe, and target portfolio construction parametersCC. Trade settlement workflows, custodian oversight, and business continuity plansDD. Stress testing frameworks, Value-at-Risk limit governance, and valuation policies for illiquid assets

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5. 05

   Market risk

   Question 5. Under the Fundamental Review of the Trading Book internal models approach, a bank measuring regulatory market risk across trading desks with varying asset classes accounts for illiquidity by

   Answer to question 5

   AA. computing Value at Risk over a single uniform holding period regardless of individual risk factor liquidity.BB. calculating portfolio volatility and multiplying it by an unweighted sum of the individual liquidation horizons.CC. calculating a base expected shortfall and scaling incremental risk across cascading sub-portfolios defined by prescribed liquidity tiers.DD. scaling a single overall expected shortfall by the simple ratio of the longest liquidation horizon to the shortest liquidation horizon.

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Questions from the MiloPrep question bank. Independently authored practice, not official exam items. This short set is for learning and does not predict an exam score.