FREE FRM Study Guide 2026: Both Parts, Built to the GARP Exam

This free FRM study guide teaches to the GARP Financial Risk Manager exam — both Part I and Part II, organized the way the exam is built.^[1] The FRM is one of the most rigorous, quantitative credentials in finance, so this guide is deep: real teaching of the models, the formulas behind them, and the high-yield rules that decide pass/fail — not a summary.

And it’s interactive, not a wall of text: every Part I topic has a built-in checkpoint quiz, hover-able glossary terms, and concept questions, so you learn by doing.

Read it topic by topic, test yourself at each checkpoint, then round out your free FRM study resources with our practice questions and flashcards.

FRM Exam Snapshot

Both parts are multiple-choice and pass/fail; GARP does not publish a fixed passing percentage — its Board sets the threshold each window.^[1] You may sit both parts the same day, but Part II is only graded once you pass Part I, and you have four years from passing Part I to pass Part II. Spend your time where the weight is:^[2]

This guide covers all four Part I topic areas in depth — they are the foundation the whole credential is built on and the focus of our free practice questions — and then gives a structured overview of all six Part II areas so you can see the full path to the charter.^[2]

1 · Foundations of Risk Management

20% of Part I. This area sets the vocabulary and frameworks for the entire credential: what risk is, the major risk types, how firms govern risk, and the ethics that bind FRM holders. It is conceptual, not calculation-heavy — high-yield because it underpins everything after it.

Risk Types & the Risk-Management Process

Financial firms face market risk (prices, rates, FX), credit risk (counterparty default), operational risk (failed processes, people, systems, or external events), and liquidity risk (cannot fund or cannot sell). The risk-management process is a loop: identify, measure, monitor, and manage, then report. A firm chooses to avoid, retain, mitigate, or transfer each risk — there is no goal of zero risk, only risk taken deliberately and paid for.

CAPM, Beta & Systematic Risk

The CAPM prices only systematic risk — the market-wide risk you cannot diversify away, measured by beta. Written out, $E(R_i) = R_f + \beta_i \,(E(R_m) - R_f)$. The market portfolio has a beta of 1.0. Unsystematic (specific) risk is removed by diversification, so the market does not reward it — a foundational idea behind every portfolio-risk measure later in the curriculum.

Risk-Adjusted Performance & RAROC

Comparing returns means adjusting for the risk taken. Know the core ratios:

RAROC ties profitability to the economic capitala business consumes, so a bank can compare a trading desk and a loan book on the same footing. A unit adds value when its RAROC exceeds the firm’s cost of equity.

Governance, Basel & Enterprise Risk

Sound governance puts the board and a chief risk officer over an independent risk function, with clear risk appetite and limits. At the system level, the Basel Accords set global bank-capital and liquidity rules. Know the three pillars:^[3]

The GARP Code of Conduct

All FRM holders and candidates agree to the GARP Code of Conduct, built on principles of professional integrity, conflict-of-interest avoidance, confidentiality, and professionalism. The exam tests it by scenario — recognizing which principle a risk professional has breached — much like other finance-ethics standards.

2 · Quantitative Analysis

20% of Part I. The statistics and probability behind every risk model — the payoff is far larger than the weight because VaR, credit models, and volatility estimation all sit on this toolkit. Focus on distributions, correlation, hypothesis testing, regression, and volatility models.

Probability & Distributions

Know the workhorses: the normal distribution (symmetric, defined by mean and variance; ~68/95/99% within one/two/three standard deviations), the lognormal (used for prices, which cannot go negative), the binomial, and the Student’s t (fatter tails, used for small samples). Real financial returns have fat tails and negative skew — losses cluster more than the normal predicts, which is exactly why tail-risk measures matter.

Mean, Variance & Correlation

Correlation drives diversification: combining assets with correlation below 1 lowers portfolio standard deviation below the weighted average. The catch the FRM hammers home — correlations rise toward 1 in a crisis, so diversification fails just when it is needed. Copulas model the joint and tail behavior that simple linear correlation misses.

Hypothesis Testing & Regression

In hypothesis testing, a Type I error rejects a true null (its probability is the significance level, α) and a Type II error fails to reject a false null. Linear regression fits $Y = b_0 + b_1 X + \varepsilon$; the slope $b_1$ is the change in Y per unit of X, and $R^2$is the share of Y’s variation the model explains. Watch for the classic regression pitfalls — heteroskedasticity, autocorrelation, and multicollinearity.

Volatility, EWMA & GARCH

Volatility is not constant — it clusters (calm and turbulent periods bunch together). Two models capture this: EWMA weights recent returns more heavily via a decay factor (lambda), and GARCH adds mean reversion to a long-run variance. Both feed directly into VaR, so a question about a time-varying volatility estimate is usually pointing at one of these.

3 · Financial Markets & Products

30% of Part I — tied for the largest topic. The instruments themselves: interest rates and bonds, forwards, futures, swaps, and options, and how their risks behave. This is broad and heavily tested, so give it real time.

Interest Rates, Bonds & Duration

A bond’s price is the present value of its coupons plus par, discounted at the market yield. The single most-tested relationship is the inverse link between price and yield:^[5]

Durationmeasures price sensitivity to rates — longer maturity, lower coupon, and lower yield all raise it, and a zero-coupon bond’s duration equals its maturity. Convexitycorrects duration’s straight-line estimate for large moves. A bond trades at a premium when its coupon exceeds the yield, at par when they match, and at a discount when the coupon is below.

Forwards, Futures & Swaps

A forward is a customized OTC agreement to trade later at a set price; a future is the standardized, exchange-traded version that is marked to market daily and backed by a clearinghouse, which sharply cuts counterparty risk. A swap exchanges cash-flow streams (classically fixed for floating interest) and behaves like a series of forwards. The cost-of-carry forward price of an asset with no income is $F_0 = S_0 \, e^{rT}$.

Options & Their Payoffs

An option gives the right, not the obligation: a call to buy, a put to sell, at the strike. A long call profits when the underlying rises above strike plus premium; a long put profits when it falls below strike minus premium.

Combining options builds strategies (straddles, spreads, collars) the exam loves to test for their payoff diagrams. For European options, put-call parity links them: $c + X e^{-rT} = p + S_0$.

Derivatives Markets & Counterparties

Since the 2008 crisis, standardized OTC derivatives are increasingly pushed through central counterparties (CCPs) that net exposures and require margin, reducing systemic counterparty risk. Know the mitigants: netting agreements, collateral (margin), and central clearing. Exchange-traded futures already carry these protections; bilateral forwards do not.

4 · Valuation & Risk Models

30% of Part I — tied for the largest topic, and the heart of the FRM.This is where the toolkit becomes risk numbers: VaR, expected shortfall, option pricing and the Greeks, and stress testing. Master this section and you own the credential’s core skill.

Value at Risk (VaR)

Value at Risk is the loss not expected to be exceeded over a horizon at a confidence level — for example, a 1-day 99% VaR. It is computed three ways:

Expected Shortfall & Coherence

VaR’s flaw is that it ignores how bad the loss is beyond the cutoff. Expected shortfall (conditional VaR) is the average loss in that tail, so it captures severity.

ES is a coherent risk measure— it satisfies subadditivity (diversification never increases it), which VaR can violate. That is why Basel’s market-risk framework shifted from 99% VaR toward a 97.5% expected-shortfall measure.^[4]

Black-Scholes-Merton & the Greeks

Black-Scholes-Merton prices a European option from five inputs — underlying price, strike, time, the risk-free rate, and volatility — assuming lognormal prices and no arbitrage. Implied volatility is the only input you cannot observe directly. The Greeksare the model’s sensitivities and the language of hedging:

Stress Testing & Model Risk

Because VaR is calibrated to normal conditions, stress testing complements it by estimating losses under severe but plausible scenarios — historical (re-run 2008) or hypothetical (a sovereign default).^[7] Equally important is model risk: every number here depends on assumptions, and a model that is wrong or wrongly used can understate risk badly. Backtesting (comparing VaR to realized losses) is how you check a model is calibrated.

5 · Part II Overview — The 6 Risk Areas

Part II is 80 questions and applies the Part I toolkit to each major risk class. Below is a structured overview of all six areas and their weights so you can see the full path to the FRM charter. (Our free practice questions focus on Part I; this section maps what Part II adds.)^[2]

Market Risk Measurement & Management

20% of Part II. Goes deeper than Part I VaR: VaR mapping, the parametric and non-parametric approaches in detail, expected shortfall and other coherent measures, fixed-income and volatility risk, and the Basel market-risk capital rules (the move to ES).^[4]

Credit Risk Measurement & Management

20% of Part II. The credit-loss building blocks and how to model them:

Expected loss is PD × LGD × EAD, priced into spreads; capital covers unexpected loss. Part II adds credit scoring, structural and reduced-form default models, credit derivatives (CDS), counterparty credit risk, and credit VaR.

Operational Risk & Resilience

20% of Part II. Operational risk — loss from failed processes, people, systems, or external events — plus modern operational resilience (cyber, third-party, business continuity). Governance runs on the three lines of defense:

Part II covers loss-data modeling, the Basel Standardized Approach for operational-risk capital,^[9] key risk indicators, scenario analysis, and stress/resilience testing.

Liquidity & Treasury Risk

15% of Part II. The distinction between funding liquidity risk and market liquidity risk, liquidity-adjusted VaR, the Basel liquidity ratios (LCR and NSFR),^[8] funds-transfer pricing, and how liquidity spirals turn a market shock into a funding crisis.

Risk & Investment Management

15% of Part II.Portfolio risk from the manager’s seat: factor models, portfolio construction and risk budgeting, performance measurement (the Sharpe, Treynor, and information ratios), hedge-fund risk, and the risks of illiquid and alternative assets.

Current Issues in Financial Markets

10% of Part II. A rotating reading list of recent developments GARP judges every risk professional should know — for example, machine learning and AI in risk, climate risk, cyber risk, and the lessons of recent market events. Because it changes each cycle, study the current official readings rather than memorizing a fixed list.^[2]

How to Use This Study Guide

A study guide is a map, not the whole territory — use it alongside the GARP curriculum and our practice tools, weighting your time toward the heaviest areas. The FRM is demanding and quantitative, so disciplined, spaced practice with worked problems is what separates a pass from a fail.

FRM Glossary

Quick definitions for the terms you’ll see most across the FRM exam:

Basel Accords

International bank-capital and liquidity standards from the Basel Committee. Basel III added higher-quality capital, a leverage ratio, and liquidity ratios (LCR, NSFR).

Beta

A measure of an asset's systematic (market) risk. The market portfolio's beta is 1.0; a beta above 1 means greater systematic risk.

Black-Scholes-Merton

A model that prices a European option from the underlying price, strike, time, risk-free rate, and volatility, assuming lognormal prices and no arbitrage.

CAPM

Capital Asset Pricing Model — required return = risk-free rate + beta × (market return − risk-free rate). Prices only systematic risk.

Coherent risk measure

A risk measure satisfying monotonicity, subadditivity, positive homogeneity, and translation invariance. Expected shortfall is coherent; VaR is not always subadditive.

Convexity

The curvature of the bond price–yield relationship; it corrects duration's straight-line estimate for large rate changes and is always positive for option-free bonds.

Copula

A function that links marginal distributions into a joint distribution, used to model the joint default behavior and tail dependence that linear correlation misses.

Correlation

A standardized measure of co-movement between two variables, from −1 to +1. It drives diversification and rises toward 1 in crises.

Counterparty credit risk

The risk that the other side of a derivative or trade defaults before settling its obligations; mitigated by netting, collateral, and central clearing.

Delta

The change in an option's value for a $1 move in the underlying. Delta-hedging neutralizes small price moves; it must be rebalanced as delta changes (gamma).

Duration

A bond's price sensitivity to interest-rate changes, in years. Longer maturity, lower coupon, and lower yield all increase duration; a first-order (linear) estimate of price change.

Economic capital

The capital a firm estimates it needs to absorb unexpected losses to a chosen confidence level over a horizon, based on its own risk models.

EWMA

Exponentially weighted moving average — a volatility estimate that puts more weight on recent observations via a decay factor (lambda).

Expected loss

The average anticipated credit loss, PD × LGD × EAD. It is priced into spreads and provisions, not held against capital.

Expected shortfall (ES)

The average loss given that the loss exceeds VaR; also called conditional VaR. A coherent risk measure that captures tail severity, which VaR ignores.

Exposure at default (EAD)

The amount outstanding to a counterparty at the moment it defaults; the third input to expected loss (PD × LGD × EAD).

Funding liquidity risk

The risk a firm cannot meet cash obligations as they fall due without unacceptable loss.

GARCH

A model (generalized autoregressive conditional heteroskedasticity) that estimates time-varying volatility, capturing volatility clustering in returns.

Hedging

Taking an offsetting position to reduce exposure to a risk factor — for example, shorting futures to protect a long cash position.

Implied volatility

The volatility that makes a model price equal the option's market price; the only Black-Scholes input not directly observable.

Liquidity Coverage Ratio (LCR)

A Basel III ratio requiring banks to hold enough high-quality liquid assets to survive a 30-day stress of net cash outflows.

Loss given default (LGD)

The fraction of an exposure a lender loses if the counterparty defaults, equal to one minus the recovery rate.

Market liquidity risk

The risk a position cannot be sold quickly without significantly moving its price.

Marking to market

Revaluing a position to its current market price; exchange-traded futures are marked to market daily, which limits counterparty risk.

Net Stable Funding Ratio (NSFR)

A Basel III ratio requiring available stable funding to meet required stable funding over a one-year horizon, limiting reliance on short-term wholesale funding.

Operational risk

Loss from failed internal processes, people, and systems, or external events; includes legal risk but excludes strategic and reputational risk.

Probability of default (PD)

The likelihood that a borrower or counterparty fails to meet its obligations over a stated horizon. A key input to expected credit loss.

RAROC

Risk-adjusted return on capital — risk-adjusted return divided by economic capital; a business adds value when its RAROC exceeds the cost of equity.

Stress testing

Estimating losses under severe but plausible scenarios (historical or hypothetical) to probe tail events that VaR, calibrated to normal conditions, can miss.

Systematic risk

Non-diversifiable, market-wide risk measured by beta. It is the only risk the market rewards with higher expected return.

The Greeks

An option's price sensitivities — delta (underlying), gamma (delta's change), vega (volatility), theta (time), and rho (rates) — used to hedge.

Three lines of defense

An operational-risk governance model: 1st line = business/risk owners, 2nd line = risk management & compliance, 3rd line = independent internal audit.

Three pillars (Basel)

Pillar 1 — minimum capital for credit, market & operational risk; Pillar 2 — supervisory review; Pillar 3 — market discipline through disclosure.

Unexpected loss

The volatility of credit losses around the expected loss; economic and regulatory capital is sized to absorb it up to a high confidence level.

Unsystematic risk

Company- or industry-specific risk that diversification can largely eliminate; it is not rewarded with extra return.

Value at Risk (VaR)

An estimate of the maximum loss not expected to be exceeded over a set horizon at a given confidence level. A 1-day 99% VaR of $1M means losses should exceed$1M only ~1% of days.

Free FRM Study Materials & Resources

Everything you need to prepare for the FRM exam is free here — no paywall, no sign-up. This guide is the foundation; pair it with the rest of our free FRM study materials for active recall, timed practice, and last-minute review:

• FRM Practice Test — exam-style questions across the Part I topics, with explanations.
• FRM Flashcards — active-recall decks for the high-yield formulas, risk models, and concepts.

FRM Study Guide FAQ

References

1. 1.Global Association of Risk Professionals (GARP). “Financial Risk Manager (FRM) Certification.” GARP. ↑
2. 2.Global Association of Risk Professionals (GARP). “FRM Exam — Study Materials & Learning Objectives.” GARP. ↑
3. 3.Bank for International Settlements. “Basel III: international regulatory framework for banks.” BIS / Basel Committee. ↑
4. 4.Basel Committee on Banking Supervision. “Minimum capital requirements for market risk.” Bank for International Settlements. ↑
5. 5.U.S. Securities and Exchange Commission. “Interest Rate Risk — When Interest Rates Go Up, Prices of Fixed-Rate Bonds Fall.” SEC.gov. ↑
6. 6.U.S. Securities and Exchange Commission. “Diversification — Investor.gov.” Investor.gov. ↑
7. 7.Board of Governors of the Federal Reserve System. “Dodd-Frank Act Stress Tests.” Federal Reserve. ↑
8. 8.Basel Committee on Banking Supervision. “Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools.” Bank for International Settlements. ↑
9. 9.Basel Committee on Banking Supervision. “Operational risk — Standardised Approach (Basel III finalisation).” Bank for International Settlements. ↑
10. 10.U.S. Securities and Exchange Commission. “Assessing Your Risk Tolerance — Investor.gov.” Investor.gov. ↑

Sources for the concept answers

Every answer in the FRM concept questions above is drawn from an official primary source:

1. Bank for International Settlements / Basel Committee on Banking Supervision. “An Explanatory Note on the Basel II IRB Risk Weight Functions.” Basel Committee on Banking Supervision.
2. U.S. Securities and Exchange Commission. “Derivatives — Investor.gov.” Investor.gov / SEC.

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