Comparing a model's predicted losses with actual outcomes to count how often the loss exceeded the forecast. Too many exceptions suggest the model understates risk.
Where you will meet it
Backtesting comes up in 19 learning outcome notes across the FRM syllabus.
A few of them:
Stress Testing FRM Part I · Valuation and risk models
“Validation tests whether the models, assumptions and data are conceptually sound and work as intended, through checks on methodology, back-testing of components where possible, sensitivity tests and ongoing monitoring.”
Capital Structure in Banks FRM Part II · Credit risk measurement and management
“The exam point: backtesting a high-confidence credit loss estimate is nearly impossible with realistic history.”
Backtesting VaR FRM Part II · Market risk measurement and management
“Backtesting compares the VaR a model produced with what actually happened.”
Integrated Risk Management FRM Part II · Operational risk and resilience
“Backtesting extreme quantiles is not feasible, so validation relies on benchmarking and review.”
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