Condensed Note of FRM Part 1: Foundations of Risk Management

LO 1.a: Explain the concept of risk and compare risk management with risk taking.

LO 1.b: Evaluate, compare and apply tools and procedures used to measure and manage risk, including quantitative measures, qualitative risk assessment techniques, and enterprise risk management.

LO 1.c: Distinguish between expected loss and unexpected loss, and provide examples of each.

LO 1.d: Interpret the relationship between risk and reward and explain how conflicts of interest can impact risk management.

LO 1.e: Describe and differentiate between the key classes of risks, explain how each type of risk can arise, and assess the potential impact of each type of risk on an organization.

LO 1.f: Explain how risk factors can interact with each other and describe challenges in aggregating risk exposures.

LO 2.a: Compare different strategies a firm can use to manage its risk exposures and explain situations in which a firm would want to use each strategy.

LO 2.b: Explain the relationship between risk appetite and a firm’s risk management decisions.

LO 2.c: Evaluate some advantages and disadvantages of hedging risk exposures and explain challenges that can arise when implementing a hedging strategy.

LO 2.d: Apply appropriate methods to hedge operational and financial risks, including pricing, foreign currency, and interest rate risk.

LO 2.e: Assess the impact of risk management tools and instruments, including risk limits and derivatives.

LO 3.a: Explain changes in corporate risk governance that occurred as a result of the 2007 - 2009 financial crisis.

LO 3.b: Describe best practices for the governance of a firm’s risk management processes.

LO 3.c: Explain the risk management role and responsibilities of a firm’s board of directors.

LO 3.d: Evaluate the relationship between a firm’s risk appetite and its business strategy, including the role of incentives.

LO 3.e: Illustrate the interdependence of functional units within a firm as it relates to risk management.

LO 3.f: Assess the role and responsibilities of a firm’s audit committee.

LO 4.a: Compare different types of credit derivatives, explain their applications, and describe their advantages.

LO 4.b: Explain different traditional approaches or mechanisms that firms can use to help mitigate credit risk.

LO 4.c: Evaluate the role of credit derivatives in the 2007 - 2009 financial crisis, and explain changes in the credit derivative market that occurred as a result of the crisis.

LO 4.d: Explain the process of securitization, describe a special purpose vehicle (SPV), and assess the risk of different business models that banks can use for securitized products.

LO 5.a: Explain modern portfolio theory and interpret the Markowitz efficient frontier.

LO 5.d: Interpret and compare the capital market line and the security market line.

LO 5.b: Understand the derivation and components of the CAPM.

LO 5.c: Describe the assumptions underlying the CAPM.

LO 5.d: Interpret and compare the capital market line and the security market line.

LO 5.e: Apply the CAPM in calculating the expected return on an asset.

LO 5.f: Interpret beta and calculate the beta of a single asset or portfolio.

LO 5.g: Calculate, compare, and interpret the following performance measures: the Sharpe performance index, the Treynor performance index, the Jensen performance index, the tracking error, information ratio, and Sortino ratio.

LO 6.a: Explain the arbitrage pricing theory (APT), describe its assumptions, and compare the APT to the CAPM.

LO 6.b: Describe the inputs (including factor betas) to a multifactor model and explain the challenges of using multifactor models in hedging.

LO 6.c: Calculate the expected return of an asset using a single-factor and a multifactor model.

LO 6.e: Describe and apply the Fama-French three factor model in estimating asset returns.

LO 7.a: Explain the potential benefits of having effective risk data aggregation and reporting.

LO 7.b: Explain challenges to the implementation of a strong risk data aggregation and reporting process and the potential impacts of using poor quality data.

LO 7.c: Describe key governance principles related to risk data aggregation and risk reporting.

LO 7.d: Describe characteristics of effective data architecture, IT infrastructure, and risk reporting practices.

LO 8.a: Describe Enterprise Risk Management (ERM) and compare an ERM program with a traditional silo-based risk management program.

LO 8.c: Explain best practices for the governance and implementation of an ERM program.

LO 8.d: Describe risk culture, explain characteristics of a strong corporate risk culture, and describe challenges to the establishment of a strong risk culture at a firm.

LO 8.e: Explain the role of scenario analysis in the implementation of an ERM program and describe its advantages and disadvantages.

LO 8.f: Explain the use of scenario analysis in stress testing programs and in capital planning.

LO 9.a: Analyze the key factors that led to and derive the lessons learned from case studies involving the following risk factors:

• Interest rate risk, including the 1980s savings and loan crisis in the US

LO 9.a: Analyze the key factors that led to and derive the lessons learned from case studies involving the following risk factors:

• Funding liquidity risk, including Lehman Brothers, Continental Illinois, and Northern Rock

LO 9.a: Analyze the key factors that led to and derive the lessons learned from case studies involving the following risk factors:

• Implementing hedging strategies, including the Metallgesellschaft case

LO 9.a: Analyze the key factors that led to and derive the lessons learned from case studies involving the following risk factors:

• Model risk, including the Niederhoffer case, Long Term Capital Management, and the London Whale case

LO 9.a: Analyze the key factors that led to and derive the lessons learned from case studies involving the following risk factors:

• Rogue trading and misleading reporting, including the Barings case

LO 9.a: Analyze the key factors that led to and derive the lessons learned from case studies involving the following risk factors:

• Financial engineering and complex derivatives, including Bankers Trust, the Orange County case, and Sachsen Landesbank

LO 9.a: Analyze the key factors that led to and derive the lessons learned from case studies involving the following risk factors:

• Reputational risk, including the Volkswagen case

LO 9.a: Analyze the key factors that led to and derive the lessons learned from case studies involving the following risk factors:

• Corporate governance, including the Enron case

LO 9.a: Analyze the key factors that led to and derive the lessons learned from case studies involving the following risk factors:

• Cyber risk, including the SWIFT case

LO 10.a: Describe the historical background and provide an overview of the 2007 - 2009 financial crisis.

LO 10.b: Describe the build-up to the financial crisis and the factors that played an important role.

LO 10.c: Explain the role of subprime mortgages and collateralized debt obligations (CDOs) in the crisis.

LO 10.d: Compare the roles of different types of institutions in the financial crisis, including banks, financial intermediaries, mortgage brokers and lenders, and rating agencies.

LO 10.e: Describe trends in the short-term wholesale funding markets that contributed to the financial crisis, including their impact on systemic risk.

LO 10.f: Describe responses taken by central banks in response to the crisis.

LO 11.a: Describe the responsibility of each GARP Member with respect to professional integrity, ethical conduct, conflicts of interest, confidentiality of information, and adherence to generally accepted practices in risk management.

LO 11.a: Describe the responsibility of each GARP Member with respect to professional integrity, ethical conduct, conflicts of interest, confidentiality of information, and adherence to generally accepted practices in risk management.

LO 11.b : Describe the potential consequences of violating the GARP Code of Conduct.