FRM Cheat Sheet 2026

The 30 highest-yield FRM facts, distilled from real exam questions. Print it, save it as a PDF, or study it here — free, no sign-up.

1. Which of the following is an example of basis risk? → A hedge using a futures contract whose underlying differs slightly from the hedged asset
2. For a two-asset equal-weighted portfolio where each asset has variance 0.04 and the assets have a correlation of 0.50, the portfolio variance is: → 0.03
3. In extreme value theory (EVT), the peaks-over-threshold (POT) method models exceedances using which distribution? → Generalized Pareto distribution
4. When reviewing a bond portfolio, what does key rate duration assess that effective duration does not? → Sensitivity to changes at specific points on the yield curve
5. Expected Shortfall (ES) is considered superior to VaR primarily because: → It measures the average loss in the tail beyond the VaR threshold and is sub-additive
6. Which of the following best characterizes model risk? → Risk of losses from incorrect or misused models
7. A risk assessment review finds a portfolio's 1-day 99% VaR is $2M. What does this figure represent? → The loss expected to be exceeded on only 1% of days
8. The Gaussian copula was widely criticized after the 2008 crisis mainly because it: → Underestimated tail dependence among defaults
9. In a normal distribution, approximately what percentage of observations fall within two standard deviations of the mean? → 95%
10. What is paper trading? → Practicing trading with simulated money to test strategies without financial risk
11. In a CDO structure, which tranche absorbs the first losses from the underlying collateral pool? → Equity tranche
12. What does Value at Risk (VaR) measure at a 95% confidence level over a 1-day horizon? → The maximum loss not exceeded with 95% probability over one day
13. What is the most effective study strategy for this type of exam? → Consistent study over time using active recall, practice tests, and spaced repetition
14. What is the most important factor for long-term success in this field? → Continuous learning, practice, and adapting to changes in the industry
15. A risk review identifies that a strategy has negative skew and positive carry. What is the typical hidden danger? → Steady small gains punctuated by rare large losses
16. What is 'model risk' in the context of operational risk? → The risk of loss from decisions based on incorrect or misused financial models
17. Under Basel III, what is the standard multiplier applied to the 10-day 99% VaR for market risk capital requirements? → 3
18. What is the volatility smile phenomenon observed in equity options markets? → Out-of-the-money puts and calls have higher implied volatility than at-the-money options
19. What is the CDS spread most closely related to? → The market's implied probability of default of the reference entity
20. What can factor portfolios do to protect against numerous risk factors? → By combining the original portfolio with offsetting positions in the factor portfolios.
21. Backtesting a VaR model involves: → Comparing predicted VaR against actual daily P&L to count exceptions
22. A review of a VaR model uses a 250-day backtest with 4 breaches at 99%. Under Basel's traffic-light approach this falls in which zone? → Green zone (acceptable)
23. ‘Equals the stock return's sensitivity to a l-u nit change in the factor.' Which of the following best describes the situation? → Factor beta
24. Which statistic is used to test the overall significance of a multiple regression model? → F-statistic
25. An assessment finds a risk model ignores tail dependence. Which copula choice would better capture joint extreme events? → Student's t copula
26. Assessing a wrong-way risk situation, what is the defining characteristic? → Exposure rises as counterparty credit quality deteriorates
27. What is the purpose of a Credit Valuation Adjustment (CVA)? → To adjust the fair value of a derivative to account for counterparty default risk
28. Which validation technique compares a model's predicted default rankings against realized defaults using a discriminatory power statistic? → Backtesting via the accuracy ratio / AUC
29. An assessment of correlation assumptions during a crisis should account for which phenomenon? → Correlations often rise toward 1 in crises (correlation breakdown)
30. In hypothesis testing, a Type I error occurs when: → We reject a true null hypothesis