FRM Part 1 Foundations of Risk Management

GARP Code of Conduct
	Exam Focus
	Module 11.1: GARP Code of Conduct
	Answer Key for Module Quizzes
Reading 11
Anatomy of the Great Financial Crisis of 2007–2009
	Exam Focus
	Module 10.1: The Financial Crisis of 2007–2009
	Key Concepts
	Answer Key for Module Quizzes
Reading 10
Learning from Financial Disasters
	Exam Focus
	Module 9.1: Case Studies on Interest Rate Risk, Liquidity Risk, and Hedging Strategy
	Module 9.2: Case Studies on Model Risk and Rogue Trading
	Module 9.3: Case Studies on Financial Engineering, Reputation Risk, Corporate Governance, and Cyber Risk
	Key Concepts
	Answer Key for Module Quizzes
Reading 9
Enterprise Risk Management and Future Trends
	Exam Focus
	Module 8.1: Enterprise Risk Management
	Module 8.2: Risk Culture and Scenario Analysis
	Key Concepts
	Answer Key for Module Quizzes
Reading 8
Principles for Effective Data Aggregation and Risk Reporting
	Exam Focus
	Module 7.1: Data Quality, Governance, and Infrastructure
	Module 7.2: Risk Data Aggregation and Reporting Capabilities
	Key Concepts
	Answer Key for Module Quizzes
Reading 7
The Arbitrage Pricing Theory and Multifactor Models of Risk and Return
	Exam Focus
	Module 6.1: Multifactor Model Assumptions and Inputs
	Module 6.2: Applying Multifactor Models
	Key Concepts
	Answer Key for Module Quizzes
Modern Portfolio Theory and Capital Asset Pricing Model
	Exam Focus
	Module 5.1: Modern Portfolio Theory and the Capital Market Line
	Module 5.2: Deriving and Applying the Capital Asset Pricing Model
	Module 5.3: Performance Evaluation Measures
	Key Concepts
	Answer Key for Module Quizzes
Reading 5
Credit Risk Transfer Mechanisms
	Exam Focus
	Module 4.1: Credit Risk Transfer and Mitigation
	Key Concepts
	Answer Key for Module Quizzes
Reading 4
The Governance of Risk Management
	Exam Focus
	Module 3.1: Corporate Governance and Risk Management
	Module 3.2: Risk Governance Implementation
	Key Concepts
	Answer Key to Module Quizzes
Reading 3
How Do Firms Manage Financial Risk?
	Exam Focus
	Module 2.1: Corporate Risk Management
	Module 2.2: Risk Management Methods and Instruments
	Key Concepts
	Answer Key for Module Quizzes
Reading 2
The Building Blocks of Risk Management
	Exam Focus
	Module 1.1: Introduction to Risk Management
	Module 1.2: Types of Risk
	Key Concepts
	Answer Key for Module Quizzes
Reading 1
Welcome to the 2020 SchweserNotes™
	Learning Objectives and Reading Assignments
Reading 6
GARP Code of Conduct
	Exam Focus
	Module 11.1: GARP Code of Conduct
	Answer Key for Module Quizzes
Reading 11
Anatomy of the Great Financial Crisis of 2007-2009
	Exam Focus
	Module 10.1: The Financial Crisis of 2007–2009
	Key Concepts
	Answer Key for Module Quizzes
Reading 10
Learning from Financial Disasters
	Exam Focus
	Module 9.1: Case Studies on Interest Rate Risk, Liquidity Risk, and Hedging Strategy
	Module 9.2: Case Studies on Model Risk and Rogue Trading
	Module 9.3: Case Studies on Financial Engineering, Reputation Risk, Corporate Governance, and Cyber Risk
	Key Concepts
	Answer Key for Module Quizzes
Reading 9
Enterprise Risk Management and Future Trends
	Exam Focus
	Module 8.1: Enterprise Risk Management
	Module 8.2: Risk Culture and Scenario Analysis
	Key Concepts
	Answer Key for Module Quizzes
Reading 8
Principles for Effective Data Aggregation and Risk Reporting
	Exam Focus
	Module 7.1: Data Quality, Governance, and Infrastructure
	Module 7.2: Risk Data Aggregation and Reporting Capabilities
	Key Concepts
	Answer Key for Module Quizzes
Reading 7
The Arbitrage Pricing Theory and Multifactor Models of Risk and Return
	Exam Focus
	Module 6.1: Multifactor Model Assumptions and Inputs
	Module 6.2: Applying Multifactor Models
	Key Concepts
	Answer Key for Module Quizzes
Reading 6
Modern Portfolio Theory and Capital Asset Pricing Model
	Exam Focus
	Module 5.1: Modern Portfolio Theory and the Capital Market Line
	Module 5.2: Deriving and Applying the Capital Asset Pricing Model
	Module 5.3: Performance Evaluation Measures
	Key Concepts
	Answer Key for Module Quizzes
Reading 5
Credit Risk Transfer Mechanisms
	Exam Focus
	Module 4.1: Credit Risk Transfer and Mitigation
	Key Concepts
	Answer Key for Module Quizzes
Reading 4
The Governance of Risk Management
	Exam Focus
	Module 3.1: Corporate Governance and Risk Management
	Module 3.2: Risk Governance Implementation
	Key Concepts
	Answer Key to Module Quizzes
Reading 3
How Do Firms Manage Financial Risk?
	Exam Focus
	Module 2.1: Corporate Risk Management
	Module 2.2: Risk Management Methods and Instruments
	Key Concepts
	Answer Key for Module Quizzes
Reading 2
The Building Blocks of Risk Management
	Exam Focus
	Module 1.1: Introduction to Risk Management
	Module 1.2: Types of Risk
	Key Concepts
	Answer Key for Module Quizzes
Reading 1
Welcome to the 2020 SchweserNotes™
	Learning Objectives and Reading Assignments
Formulas
	Reading 1
	Reading 5
Reading 1
	The topical coverage corresponds with the following CFA Institute assigned reading:
	1. The Building Blocks of Risk Management
		The candidate should be able to:
			LO 1.a: Explain the concept of risk and compare risk management with risk taking.
				LO 1.b: Describe elements, or building blocks, of the risk management process and identify problems and challenges that can arise in the risk management process.
				LO 1.c: Evaluate and apply tools and procedures used to measure and manage risk, including quantitative measures, qualitative assessment and enterprise risk management.
				LO 1.d: Distinguish between expected loss and unexpected loss and provide examples of each.
				LO 1.e: Interpret the relationship between risk and reward and explain how conflicts of interest can impact risk management.
				LO 1.f: 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.g: Explain how risk factors can interact with each other and describe challenges in aggregating risk exposures.
Reading 2
	The topical coverage corresponds with the following CFA Institute assigned reading:
	2. Reading 2: How Do Firms Manage Financial Risk?
		The candidate should be able to:
			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.
Reading 3
	The topical coverage corresponds with the following CFA Institute assigned reading:
	3. Reading 3: The Governance of Risk Management
		The candidate should be able to:
			LO 3.a: Explain changes in corporate risk governance that occurred as a result of the 2007-2009 financial crisis.
				LO 3.b: Compare and contrast best practices in corporate governance with those of risk management.
				LO 3.c: Assess the role and responsibilities of the board of directors in risk governance.
				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.
Reading 4
	The topical coverage corresponds with the following CFA Institute assigned reading:
	4. Reading 4: Credit Risk Transfer Mechanisms
		The candidate should be able to:
			LO 4.a: Compare different types of credit derivatives, explain how each one transfers credit risk and describe their advantages and disadvantages.
				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.
Reading 5
	The topical coverage corresponds with the following CFA Institute assigned reading:
	5. Reading 5: Modern Portfolio Theory and Capital Asset Pricing Model
		The candidate should be able to:
			LO 5.a: Explain modern portfolio theory and interpret the Markowitz efficient frontier.
				LO 5.d: Interpret the capital market line.
				LO 5.c: Describe the assumptions underlying the CAPM.
				LO 5.f: Interpret beta and calculate the beta of a single asset or portfolio.
				LO 5.b: Understand the derivation and components of the CAPM.
				LO 5.e: Apply the CAPM in calculating the expected return on an asset.
				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.
Reading 6
	The topical coverage corresponds with the following CFA Institute assigned reading:
	6. Reading 6: The Arbitrage Pricing Theory and Multifactor Models of Risk and Return
		The candidate should be able to:
			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.
				LO 6.c: Calculate the expected return of an asset using a single-factor and a multifactor model.
				LO 6.d: Explain models that account for correlations between asset returns in a multi-asset portfolio.
				LO 6.e: Explain how to construct a portfolio to hedge exposure to multiple factors.
				LO 6.f: Describe and apply the Fama-French three-factor model in estimating asset returns.
Reading 7
	The topical coverage corresponds with the following CFA Institute assigned reading:
	7. Reading 7: Principles for Effective Data Aggregation and Risk Reporting
		The candidate should be able to:
			LO 7.a: Explain the potential benefits of having effective risk data aggregation and reporting.
				LO 7.b: Describe the impact of data quality on model risk and the model development process.
				LO 7.c: Describe key governance principles related to risk data aggregation and risk reporting practices.
				LO 7.d: Identify the governance framework, risk data architecture and IT infrastructure features that can contribute to effective risk data aggregation and risk reporting practices.
				LO 7.e: Describe characteristics of a strong risk data aggregation capability and demonstrate how these characteristics interact with one another.
				LO 7.f: Describe characteristics of effective risk reporting practices.
				LO 7.g: Describe the role that supervisors play in the monitoring and implementation of the risk data aggregation and reporting practices.
Reading 8
	The topical coverage corresponds with the following CFA Institute assigned reading:
	8. Reading 8: Enterprise Risk Management and Future Trends
		The candidate should be able to:
			LO 8.a: Describe Enterprise Risk Management (ERM) and compare an ERM program with a traditional silo-based risk management program.
				LO 8.b: Compare the benefits and costs of ERM and describe the motivations for a firm to adopt an ERM initiative.
				LO 8.c: Explain best practices for the governance and implementation of an ERM program.
				LO 8.d: Describe important dimensions of an ERM program and relate ERM to strategic planning.
				LO 8.e: 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.f: Explain the role of scenario analysis in the implementation of an ERM program and describe its advantages and disadvantages.
				LO 8.g: Explain the use of scenario analysis in stress testing programs and in capital planning.
Reading 9
	The topical coverage corresponds with the following CFA Institute assigned reading:
	9. Reading 9: Learning from Financial Disasters
		The candidate should be able to:
			LOS 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.
				Funding liquidity risk, including Lehman Brothers, Continental Illinois and Northern Rock
				Implementing hedging strategies, including the Metallgesellschaft case
				Model risk, including the Niederhoffer case, Long Term Capital Management and the London Whale case
				Rogue trading and misleading reporting, including the Barings case
				Financial engineering and complex derivatives, including Bankers Trust, the Orange County case, and Sachsen Landesbank
				Reputational risk, including the Volkswagen case
				Corporate governance, including the Enron case
				Cyber risk, including the SWIFT case.
Reading 10
	The topical coverage corresponds with the following CFA Institute assigned reading:
	10. Reading 10: Anatomy of the Great Financial Crisis of 2007–2009
		The candidate should be able to:
			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.
Reading 11
	The topical coverage corresponds with the following CFA Institute assigned reading:
	11. Reading 11: GARP Code of Conduct
		The candidate should be able to:
			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.