FINANCIAL RISK MANAGEMENT (FRM) EXAM
QUESTIONS AND CORRECT ANSWERS (VERIFIED
ANSWERS) Q&A 2026 |INSTANT DOWNLOAD PDF
1. What is the primary objective of financial risk
management?
A. Maximize profit
B. Eliminate all risk
C. Identify, measure, and manage risk
D. Increase leverage
Rationale: Risk management focuses on controlling not
eliminating risk while supporting objectives.
Correct: C
2. Which risk arises from changes in interest rates?
A. Credit risk
B. Market risk
C. Liquidity risk
D. Operational risk
Rationale: Interest rate movements affect asset values under
market risk.
Correct: B
3. Credit risk refers to:
,A. Exchange rate fluctuations
B. Counterparty default risk
C. System failure risk
D. Inflation risk
Rationale: Credit risk is the risk of borrower default.
Correct: B
4. Value at Risk (VaR) measures:
A. Maximum possible loss
B. Expected profit
C. Potential loss over a time period at a confidence level
D. Liquidity buffer
Rationale: VaR estimates potential loss under normal
conditions.
Correct: C
5. Which is NOT a type of financial risk?
A. Market risk
B. Credit risk
C. Strategic risk
D. Thermal risk
Rationale: Thermal risk is not financial in nature.
Correct: D
,6. Operational risk includes:
A. Market volatility
B. Internal process failures
C. Stock price changes
D. Inflation
Rationale: Operational risk arises from internal failures.
Correct: B
7. Liquidity risk is the risk of:
A. Interest rate change
B. Inability to meet short-term obligations
C. Default by borrower
D. Currency fluctuation
Rationale: Liquidity risk concerns cash flow shortages.
Correct: B
8. Diversification reduces:
A. Systematic risk
B. Unsystematic risk
C. Market risk only
D. Inflation risk
Rationale: Diversification reduces firm-specific risk.
Correct: B
, 9. Systematic risk is:
A. Diversifiable
B. Market-wide risk
C. Company-specific risk
D. Avoidable risk
Rationale: Systematic risk affects all assets.
Correct: B
10. The Sharpe ratio measures:
A. Liquidity
B. Risk-adjusted return
C. Credit exposure
D. Default probability
Rationale: It compares excess return to volatility.
Correct: B
11. Which derivative is a contractual obligation?
A. Option
B. Forward
C. Warrant
D. Convertible bond
Rationale: Forwards require both parties to perform.
Correct: B
QUESTIONS AND CORRECT ANSWERS (VERIFIED
ANSWERS) Q&A 2026 |INSTANT DOWNLOAD PDF
1. What is the primary objective of financial risk
management?
A. Maximize profit
B. Eliminate all risk
C. Identify, measure, and manage risk
D. Increase leverage
Rationale: Risk management focuses on controlling not
eliminating risk while supporting objectives.
Correct: C
2. Which risk arises from changes in interest rates?
A. Credit risk
B. Market risk
C. Liquidity risk
D. Operational risk
Rationale: Interest rate movements affect asset values under
market risk.
Correct: B
3. Credit risk refers to:
,A. Exchange rate fluctuations
B. Counterparty default risk
C. System failure risk
D. Inflation risk
Rationale: Credit risk is the risk of borrower default.
Correct: B
4. Value at Risk (VaR) measures:
A. Maximum possible loss
B. Expected profit
C. Potential loss over a time period at a confidence level
D. Liquidity buffer
Rationale: VaR estimates potential loss under normal
conditions.
Correct: C
5. Which is NOT a type of financial risk?
A. Market risk
B. Credit risk
C. Strategic risk
D. Thermal risk
Rationale: Thermal risk is not financial in nature.
Correct: D
,6. Operational risk includes:
A. Market volatility
B. Internal process failures
C. Stock price changes
D. Inflation
Rationale: Operational risk arises from internal failures.
Correct: B
7. Liquidity risk is the risk of:
A. Interest rate change
B. Inability to meet short-term obligations
C. Default by borrower
D. Currency fluctuation
Rationale: Liquidity risk concerns cash flow shortages.
Correct: B
8. Diversification reduces:
A. Systematic risk
B. Unsystematic risk
C. Market risk only
D. Inflation risk
Rationale: Diversification reduces firm-specific risk.
Correct: B
, 9. Systematic risk is:
A. Diversifiable
B. Market-wide risk
C. Company-specific risk
D. Avoidable risk
Rationale: Systematic risk affects all assets.
Correct: B
10. The Sharpe ratio measures:
A. Liquidity
B. Risk-adjusted return
C. Credit exposure
D. Default probability
Rationale: It compares excess return to volatility.
Correct: B
11. Which derivative is a contractual obligation?
A. Option
B. Forward
C. Warrant
D. Convertible bond
Rationale: Forwards require both parties to perform.
Correct: B
