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FRM ® Study Guide 2017 2017 Financial Risk Manager (FRM) Exam Study Guide 3 TOP

FRM ® Study Guide 2017 2017 Financial Risk Manager (FRM) Exam Study Guide 3 TOPIC OUTLINE, READINGS, TEST WEIGHTINGS The Study Guide sets forth primary topics and subtopics covered in the FRM Exam Part I and Part II. The topics were selected by the FRM Committee as essential for today’s risk managers to master. The topics and their respective weightings are reviewed yearly to ensure the Exams are timely and relevant. The Study Guide also contains a full listing of all of the readings that are recommended as preparation for the FRM Exam Part I and Part II. Key concepts appear as bullet points at the beginning of each section and are intended to help candidates identify the major themes and knowledge areas associated with that section FRM EXAM APPROACH The FRM Exams are practice-oriented. The questions are derived from a combination of theory, as set forth in the readings, and “real- world” work experience. Candidates are expected to understand risk management concepts and approaches, as well as the ways in which they would apply to a risk manager’s day-to-day activities. It is rare that a risk manager will be faced with an issue that can immediately be slotted into one category. In the real world, a risk manager must be able to identify any number of risk-related issues and be able to deal with them effectively. As such, the Exams are comprehensive in nature, testing a candidate on a number of risk management concepts and approaches. READINGS Questions for the FRM Exams are related to and supported by the readings listed under each topic outline. These readings were selected by the FRM Committee to assist candidates in their review of the subjects covered by the Exams. It is strongly suggested that candidates review these readings in depth prior to sitting for each Exam. All of the readings listed in the FRM Study Guide are available through GARP. Further information can be found on the GARP website. FRM EXAM PREP PROVIDERS Some candidates may want to more formally review the materials with FRM Exam Preparation Providers (EPPs). A list of EPPs that have registered with GARP can be found on the GARP website. GARP does not endorse any EPP but merely lists them as a service to FRM candidates. 2017 Financial Risk Manager (FRM ®) Exam Study Guide The world’s most highly respected designation for risk management professionals On the following pages, an asterisk after a reading title indicates that the reading is freely available on the GARP website. 4 Foundations of Risk Management Part I Exam Weight | 20% Topics and Readings FRM EXAM PART I This area focuses on foundational concepts of risk management and how risk management can add value to an organization. The broad knowledge points covered in Foundations include the following: • Basic risk types, measurement and management tools • Creating value with risk management • The role of risk management in corporate governance • Enterprise Risk Management (ERM) • Financial disasters and risk management failures • The Capital Asset Pricing Model (CAPM) • Risk-adjusted performance measurement • Multifactor models • Data aggregation and risk reporting • Ethics and the GARP Code of Conduct To cover these broad knowledge points, a set of curated readings are listed on the following page. While detailed learning objectives associated with these readings are presented in the 2017 FRM Learning Objectives document, a brief summary of how to relate these readings to the knowledge points follows. Reading 1 contains three chapters with the first two giving a broad overview of risk, different risk types, and how risks can arise in an organization. The third chapter describes the role of corporate governance in risk management including the role of the board of directors and other areas of an or- ganization. The concept of an organization’s risk appetite and how this is translated into a risk appetite framework and communicated throughout an organization is presented as well. Reading 2 introduces Enterprise Risk Management (ERM), a common and important method for assessing and managing risk in an organizational context. Reading 3 focuses more specifically on risk taking by banks and how risk management can add or destroy value in these institutions. As it is always important to learn from history, the next several readings (Readings 4, 5, and 6) describe various financial disasters from the past with a particular focus on the recent global financial crisis. Reading 7 gives a nuanced approach to interpreting financial failures and the role that risk man- agement may, or may not, have played in them. Reading 8 presents the capital asset pricing model (CAPM), one of the foundational developments in risk-adjusted pricing and valuation. This is followed by a discussion, in Reading 9, of several common- ly used CAPM-related risk measures and their application to performance measurement. Reading 10 moves beyond CAPM and introduces factor models and how they can be used to model returns. Data is the lifeblood of many large financial organizations and aggregating and reporting risk data has become increasingly important. Reading 11 addresses this important topic. To help ensure ethical standards are upheld in the risk management profession, Reading 12 contains GARP’s Code of Conduct, a document that all FRMs are subject to. 2017 Financial Risk Manager (FRM) Exam Study Guide 5 Readings for Foundations of Risk Management 1. Michel Crouhy, Dan Galai, and Robert Mark, The Essentials of Risk Management, 2nd Edition (New York: McGraw-Hill, 2014). • Chapter 1. Risk Management: A Helicopter View (Including Appendix 1.1. Typology of Risk Exposures) • Chapter 2. Corporate Risk Management: A Primer • Chapter 4. Corporate Governance and Risk Management 2. James Lam, Enterprise Risk Management: From Incentives to Controls, 2nd Edition (Hoboken, NJ: John Wiley & Sons, 2014). • Chapter 4. What is ERM? 3. René Stulz, “Risk Management, Governance, Culture and Risk Taking in Banks,” FRBNY Economic Policy Review, (August 2016): 43-59. 4. Steve Allen, Financial Risk Management: A Practitioner’s Guide to Managing Market and Credit Risk, 2nd Edition (New York: John Wiley & Sons, 2013). • Chapter 4. Financial Disasters 5. Markus K. Brunnermeier, 2009. “Deciphering the Liquidity and Credit Crunch 2007—2008,” Journal of Economic Perspectives 23:1, 77—100. 6. Gary Gorton and Andrew Metrick, 2012. “Getting Up to Speed on the Financial Crisis: A One-Weekend- Reader’s Guide,” Journal of Economic Literature 50:1, 128—150. 7. René Stulz, “Risk Management Failures: What Are They and When Do They Happen?” Fisher College of Business Working Paper Series, October 2008. 8. Edwin J. Elton, Martin J. Gruber, Stephen J. Brown and William N. Goetzmann, Modern Portfolio Theory and Investment Analysis, 9th Edition (Hoboken, NJ: John Wiley & Sons, 2014). • Chapter 13. The Standard Capital Asset Pricing Model 9. Noel Amenc and Veronique Le Sourd, Portfolio Theory and Performance Analysis (West Sussex, England: John Wiley & Sons, 2003). • Chapter 4. Applying the CAPM to Performance Measurement: Single-Index Performance Measurement Indicators (Section 4.2 only) 10. Zvi Bodie, Alex Kane, and Alan J. Marcus, Investments, 10th Edition (New York: McGraw-Hill, 2013). • Chapter 10. Arbitrage Pricing Theory and Multifactor Models of Risk and Return 11. “Principles for Effective Data Aggregation and Risk Reporting,” (Basel Committee on Banking Supervision Publication, January 2013). 12. GARP Code of Conduct.* *This reading is freely available on the GARP website. 6 Quantitative Analysis Part I Exam Weight | 20% Topics and Readings FRM EXAM PART I This area tests a candidate’s knowledge of basic probability and statistics, regression and time series analysis, and various quantitative techniques useful in risk management. The broad knowledge points covered in Quantitative Analysis include the following: • Discrete and continuous probability distributions • Estimating the parameters of distributions • Population and sample statistics • Bayesian analysis • Statistical inference and hypothesis testing • Estimating correlation and volatility using EWMA and GARCH models • Volatility term structures • Correlations and copulas • Linear regression with single and multiple regressors • Time series analysis and forecasting • Simulation methods To cover these broad knowledge points, a set of curated readings are listed on the following page. While detailed learning objectives associated with these readings are presented in the 2017 FRM Learning Objectives document, a brief summary of how to relate these readings to the knowledge points follows. Reading 13 consists of five chapters. These chapters introduce basic, fundamental concepts related to probability, statistics, probability distributions, Bayesian analysis, hypothesis testing, and confidence intervals. Regression analysis is an important statistical tool used to investigate relationships between variables. The first three chapters in Reading 14 give a general introduction to regression analysis. These chapters cover both single and multiple variable linear regression analysis. The fourth chapter presents methods for quantifying the estimation error associated with ordinary least squares regression and how to structure and evaluate tests of statistical hypotheses. Time series data occur frequently in finance. The four chapters in Reading 15 describe methods for analyzing time series data in order to estimate statistics and extract other meaningful characteristics of the data. The first chapter focuses on modeling and forecasting trends. uploads/Management/ 2017-frm-study-guide.pdf