FRM Part 1 Free Practice Questions for 2026: Test Your Exam Readiness
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The FRM Part I exam remains one of the most important milestones for candidates who want to build strong, practical knowledge in financial risk management in 2026. According to GARP, FRM Part I is a computer-based exam with 100 multiple-choice questions covering four core areas: Foundations of Risk Management, Quantitative Analysis, Financial Markets and Products, and Valuation and Risk Models. GARP also publishes updated 2026 Learning Objectives and a 2026 Study Guide, which means candidates should practice with material that reflects the current syllabus rather than outdated question sets.
Use these questions as a readiness check, not just a score check. The real value is not only getting the right answer, but understanding why it is correct and why the other choices are wrong. Start with the questions below and see how ready you really are for the 2026 FRM Part I exam. FRM Part 1 Free Practice Questions for 2026
1) Credit risk transfer and collateral FRM Part 1 Free Practice Questions for 2026
A bank lends to an independent oil producer and takes barrels of crude oil as collateral. Six months later, oil prices collapse sharply, the borrower’s cash flow weakens, and the bank realizes the collateral has also lost value.
Which risk concept is most directly illustrated?
A. Netting risk
B. Wrong-way risk
C. Reassignment risk
D. Margin period risk
2) Securitization structure
A lender originates a large pool of auto loans and transfers them into a newly formed legal entity. That entity issues senior notes, junior notes, and an equity piece to investors. The treasurer argues that the senior class should absorb first losses because it is the safest piece.
Which statement is most accurate?
A. The SPV only guarantees the loans; the sponsor still owns the collateral pool.
B. The senior tranche absorbs first losses and is therefore typically unrated.
C. The equity or residual tranche absorbs losses first because it is paid only after the debt tranches.
D. Under originate-to-distribute, the sponsor continues to face the same liquidity risk because it still owns the loans.
3) APT versus CAPM
A portfolio manager claims that the Arbitrage Pricing Theory is just CAPM with extra notation, because it still requires investors to hold mean-variance efficient portfolios and tells you exactly which factors must be priced.
Which response is most accurate?
A. Correct, because APT is CAPM with SMB and HML added mechanically.
B. Correct, because APT requires normal returns and mean-variance efficiency.
C. Incorrect, because APT does not specify the factors a priori and instead relies on no-arbitrage among well-diversified portfolios.
D. Incorrect, because APT prices only idiosyncratic risk, whereas CAPM prices systematic risk.
4) Fama-French HML interpretation
An analyst compares two firms. Firm A has consistently high earnings and a high market value relative to book value. Firm B has persistently weak earnings and trades cheaply relative to book value.
Under the Fama-French interpretation of HML as a proxy for relative distress, which is most likely?
A. Firm A has a positive HML loading and Firm B a negative HML loading.
B. Firm A has a negative HML loading and Firm B a positive HML loading.
C. Both firms should have zero HML loadings because distress is captured only by SMB.
D. Both firms should have positive HML loadings because book value is always preferred to market value.
5) Regression
A risk analyst models a stock’s excess return against market excess return using the regression below:
Y = α + β1X + β2(X × D) + ε
where D equals 1 when the market excess return is negative and 0 otherwise.
Which of the following statements is most accurate?
A. When D = 1, the intercept becomes α + β2 and the slope remains β1.
B. When D = 1, the slope becomes β1 + β2, so X × D is a slope dummy.
C. The model is invalid because X and X × D cannot both appear in a linear regression.
D. The model cannot be estimated using OLS because D is a binary variable.
6) Stress testing versus stressed ES
A CRO says: “Our stressed expected shortfall is calibrated from a severe historical period, so it already tells us whether the bank would survive a full-year replay of that crisis. It can also be back-tested the same way as ordinary VaR.”
Which statement is most accurate?
A. Correct, because stressed ES and enterprise-wide stress testing are effectively the same once a stressed window is selected.
B. Correct, because stressed ES is forward-looking, whereas stress testing is backward-looking.
C. Incorrect, because stressed ES is still a short-horizon conditional risk measure based on a stressed past period; it does not answer full survival questions and cannot be back-tested in the same way as ordinary VaR.
D. Incorrect only because ES should be replaced by delta-gamma approximations in severe scenarios.
7) Commodity forward pricing
A refinery manager says the forward price on crude oil must equal the spot price compounded at the risk-free rate, just like a non-dividend-paying stock, because arbitrage will force equality.
Which statement is most accurate?
A. Correct, because consumption commodities and financial assets obey the same exact no-arbitrage relation.
B. Incorrect, because for consumption commodities storage costs matter and no-arbitrage usually gives only an upper bound unless convenience yield is taken into account.
C. Incorrect, because commodity forwards are determined only by expected future spot prices and never by arbitrage.
D. Correct, provided the commodity has seasonal demand.
8) Quantitative: implied lease rate
Gold is held as an investment commodity. Its spot price is 1,240, the 6-month futures price is 1,250, and the 6-month risk-free rate is 4% with annual compounding.
What is the implied annual lease rate?
A. 2.342656%
B. 4.000000%
C. 1.600000%
D. -2.342656%
9) Quantitative: one-step binomial option valuation
A non-dividend-paying stock is currently priced at 50. In 3 months it will either rise to 60 or fall to 40. A 3-month European call option has a strike price of 52. The continuously compounded risk-free rate is 3%.
What is the no-arbitrage value of the call option?
A. 4.119551
B. 5.731010
C. 3.880449
D. 8.000000
10) Quantitative: Treasury bond futures delivery invoice
A party with a short position in a Treasury bond futures contract delivers a bond when the most recent settlement price is 105.50, the bond’s conversion factor is 1.1542, and accrued interest is 1.12 per 100 of face value. One contract is based on 100,000 face value.
How much cash does the short receive?
A. 121,768.10
B. 122,888.10
C. 105,501.12
D. 123,420.00
Answers and Explanations
1) B. Wrong-way risk
This is wrong-way risk because the same development that raises the borrower’s probability of default also reduces the value of the collateral. The classic example is an oil company posting crude oil as collateral while falling oil prices both weaken the borrower and impair the collateral.
2) C. The equity or residual tranche absorbs losses first because it is paid only after the debt tranches.
In a securitization, the SPV purchases the pool and finances it by issuing tranches. The senior class has the greatest protection and is typically AAA, while the equity or residual class receives proceeds only after all debt classes are paid and therefore bears the greatest credit risk. Under originate-to-distribute, the sponsor no longer owns the collateral and reduces credit, price, and liquidity risk relative to originate-and-hold.
3) C. Incorrect, because APT does not specify the factors a priori and instead relies on no-arbitrage among well-diversified portfolios.
APT assumes that returns are driven by systematic factors, that idiosyncratic risk can be diversified away, and that no arbitrage opportunities persist among well-diversified portfolios. Unlike CAPM, it does not require investors to hold efficient portfolios and it does not tell you in advance which factors must be used.
4) B. Firm A has a negative HML loading and Firm B a positive HML loading.
In the Fama-French interpretation, HML is a proxy for relative distress. Strong firms with consistently high earnings tend to have negative HML slopes, while weak firms with consistently low earnings tend to have positive HML slopes because weaker firms often have lower market values relative to book.
5) B. When D = 1, the slope becomes β1 + β2, so X × D is a slope dummy.
With the interaction term, the regression becomes:
When D = 0:
Y = α + β1X + ε
When D = 1:
Y = α + β1X + β2X + ε
Y = α + (β1 + β2)X + ε
This shows that when D = 1, the coefficient on X is no longer β1 alone. It becomes β1 + β2.
Therefore, the dummy variable does not change the intercept. Instead, it changes the slope of the relationship between Y and X. That is why X × D is called a slope dummy.
6) C. Incorrect, because stressed ES is still a short-horizon conditional risk measure based on a stressed past period; it does not answer full survival questions and cannot be back-tested in the same way as ordinary VaR.
Stressed VaR and stressed ES are conditional on a repeat of a stressed historical period and usually focus on short horizons such as one to ten days. Enterprise stress testing instead asks broader forward-looking survival questions over much longer horizons, and neither stressed VaR nor stress testing can be back-tested in the same way as ordinary VaR.
7) B. Incorrect, because for consumption commodities storage costs matter and no-arbitrage usually gives only an upper bound unless convenience yield is taken into account.
For many commodities, especially consumption assets, the simple financial-asset forward pricing relation does not pin down the exact market price. Storage costs matter, and no-arbitrage often provides only an upper bound unless convenience yield is incorporated.
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