8/8/2019 CFA & FRM

1/8

E X A M F O C U S

The FRM exam is a practice-oriented examination. Its questions are derived from a combination oftheory, as set forth in the readings, and real-world work experience. Candidates are expected tounderstand risk management concepts and approaches and how they would apply to a riskmanagers day-to-day activities.

The FRM Exam Part I will cover the following topics:

Topic Area Weights

Foundations of Risk Management 20%

Quantitative Analysis 20%

Financial Markets and Products 30%

Valuation and Risk Models 30%

The FRM Exam Part II will cover the following topics:

Topic Area Weights

Market Risk Measurement and Management 25%

Credit Risk Measurement and Management 25%Operational and Integrated Risk Management 25%

Risk Management and Investment Management 15%

Current Issues in Financial Markets 10%

The FRM Exam Part I will have 100 multiple-choice questions. The FRM Exam Part II will have 80multiple-choice questions. The exact number of questions is subject to minimal change. Each examwill be 4 hours in length, with a 120 minute break in between.

T O P I C S A N D R E A D I N G S

I. Foundations of Risk Management Part

A. Creating value with risk managementB. Market efficiency, equilibrium and the Capital Asset Pricing Model (CAPM)C. Performance measurement and attributionD. Sharpe ratio and information ratioE. Tracking errorF. Factor models and Arbitrage Pricing Theory

8/8/2019 CFA & FRM

2/8

G. Risk management failuresH. Case studiesI. Ethics

II. Quantitative Analysis

A. Probability distributionsB. Mean, standard deviation, correlation, skewness, and kurtosisC. Estimating parameters of distributionsD. Linear regressionE. Statistical inference and hypothesis testingF. Estimating correlation and volatility: EWMA, GARCH modelsG. Maximum likelihood methodsH. Volatility term structuresI. Simulation methods

III. Financial Markets and Products

A. Clearing house mechanisms, structural hubs, exchanges

B. Netting, collateral and downgrade triggersC. Futures, forwards, swaps, and optionsD. Derivatives on fixed income securities, interest rates, foreign exchange, equities, and

commoditiesE. Measuring portfolio exposuresF. American options, effects of dividends, early exerciseG. Trading strategies with derivativesH. Minimum variance hedge ratioI. Cheapest to deliver bond, conversion factorsJ. Commodity derivatives, cost of carry, lease rate, convenience yieldK. Basis risk

L. Foreign exchange riskM. Corporate bondsN. Debt equity swaps, loan sales

IV. Valuation and Risk Models Part

A. Value-at-Risk (VaR)B. Definition and methodsC. Delta normal valuation, full revaluation, historical simulation, Monte Carlo simulation methodsD. Applications of VaR for market, credit and operational riskE. VaR of linear and non-linear derivatives

F. VaR for fixed income securities with embedded optionsG. Term structure of interest ratesH. Discount factors, arbitrage, yield curvesI. Bond prices, spot rates, forward ratesJ. DV01, duration and convexity, duration based hedgingK. Credit rating agencies, credit ratingsL. Credit transition matricesM. Sovereign risk and country risk evaluationN. Binomial treesO. Black-Scholes-Merton modelP. Greeks

8/8/2019 CFA & FRM

3/8

8/8/2019 CFA & FRM

4/8

C. Risk budgetingD. Setting risk limitsE. Hedge fund risk managementF. Risk return metrics specific to hedge fundsG. Risks of specific strategies (fixed income arbitrage, merger arbitrage, convert arbitrage, equity

long/short market neutral, macro, distressed debt, emerging markets)H. Asset illiquidity, valuation, and risk measurementI. The use of leverage and derivatives and the risks they createJ. Measuring exposures to risk factors (dynamic strategies, leverage, derivatives, style drift)K. Pension fund risk management

IX. Current Issues in Financial Markets

A. Causes and consequences of the current crisisB. Subprime mortgage designC. Mortgages and securitization, subprime CDOsD. Liquidity crisesE. Use and limitations of VaRF. Hedge funds and systemic risk

8/8/2019 CFA & FRM

5/8

E X A M F O C U S

At Level I , candidates are asked basic knowledge and comprehension questions and must performsome analysis.

Exam focus here is on:

Tools and concepts that apply to investment valuation and portfolio managementBasic concepts regarding securities and marketsCFA Institute Code of Ethics and Standards of Professional Conduct

The Level I exams include 240 total multiple choice questions, 120 on the morning session of theexam and 120 on the afternoon session. Each multiple choice question is free-standing (notdependent on other questions) and has three possible answers: A, B, and C. All questions are equallyweighted and there is no penalty for guessing.

At Level II focus is on asset valuation. The learning focus also changes, from knowledge andcomprehension (Level I), to application and analysis (Level II).

Level 2 Examination concentrates on:

Asset valuationApplication of tools and concepts of investment valuation

Industry and company analysisInstitute Code of Ethics and Standards of Professional Conduct

The Level II CFA exam consists of 20 item sets 10 on the morning session of the exam and 10on the afternoon session. Item sets are sometimes called mini-cases. Each item set on the CFA exam consists of a vignette (or case statement) and six multiple choice items (questions).

At Level III topic focus is on portfolio management. The learning focus also changes, from knowledgeand comprehension (Level I), to application and analysis (Level II), and to synthesis and evaluation(Level III).

Level III Examination concentrates on:

Management of institutional and individual portfoliosManagement of specific asset class portfoliosCFA Institute Code of Ethics and Standards of Professional Conduct

The Level III exam uses the essay format in the morning, and the item set format, with 10 item sets,in the afternoon.

8/8/2019 CFA & FRM

6/8

CFA Exam Topic Area Weights

Topic Area Level I Level II Level III

Ethical and Professional Standards (total) 15 10 10

Investment Tools (total) 50 30-60 0

Corporate Finance 8 05-15 0

Economics 10 05-10 0

Financial Reporting and Analysis 20 15-25 0

Quantitative Methods 12 05-10 0

Asset Classes (total) 30 35-75 35-45

Alternative Investments 3 05-15 05-15

Derivatives 5 05-15 05-15

Equity Investments 10 20-30 05-15

Fixed Income 12 05-15 10-20

Portfolio Management and Wealth Planning (total) 5 05-15 45-55

Total 100 100 100

*Note: These weights are intended to guide the curriculum and exam development processes. Actual exam weights mayvary slightly from year to year. Please note that some topics are combined for testing purposes.

T o p i c a l O u t l i n e

I. Ethical and Professional Standards

A. Professional Standards of PracticeB. Ethical Practices

II. Quantitative Methods

A. Time Value of MoneyB. ProbabilityC. Probability Distributions and Descriptive StatisticsD. Sampling and EstimationE. Hypothesis TestingF. Correlation Analysis and Regression

G. Time Series AnalysisH. Simulation AnalysisI. Technical Analysis

III. Economics

A. Market Forces of Supply and DemandB. The Firm and Industry OrganizationC. Measuring National Income and GrowthD. Business CyclesE. The Monetary System

8/8/2019 CFA & FRM

7/8

F. InflationG. International Trade and Capital FlowsH. Currency Exchange RatesI. Monetary and Fiscal PolicyJ. Economic Growth and DevelopmentK. Effects of Government RegulationL. Impact of Economic Factors on Investment Markets

IV. Financial Reporting and Analysis

A. Financial Reporting System (IFRS and GAAP)B. Principal Financial StatementsC. Financial Reporting QualityD. Analysis of InventoriesE. Analysis of Long-Lived AssetsF. Analysis of TaxesG. Analysis of DebtH. Analysis of Off-Balance-Sheet Assets and LiabilitiesI. Analysis of Pensions, Stock Compensation, and Other Employee Benefits

J. Analysis of Inter-Corporate InvestmentsK. Analysis of Business CombinationsL. Analysis of Global OperationsM. Ratio and Financial Analysis

V. Corporate Finance

A. Corporate GovernanceB. Dividend PolicyC. Capital Investment DecisionsD. Business and Financial Risk

E. Long-Term Financial PolicyF. Short-Term Financial PolicyG. Mergers and Acquisitions and Corporate Restructuring

VI. Equity Investments

A. Types of Equity Securities and Their CharacteristicsB. Equity Markets: Characteristics, Institutions, and BenchmarksC. Fundamental Analysis (Sector, Industry, Company) and the Valuation of Individual EquitySecuritiesD. Equity Market Valuation and Return Analysis

E. Special Applications of Fundamental Analysis (Residual Earnings)F. Equity of Hybrid Investment Vehicles

VII. Fixed Income

A. Types of Fixed-Income Securities and Their CharacteristicsB. Fixed-Income Markets: Characteristics, Institutions, and BenchmarksC. Fixed-Income Valuation (Sector, Industry, Company) and Return AnalysisD. Term Structure Determination and Yield SpreadsE. Analysis of Interest Rate RiskF. Analysis of Credit Risk

8/8/2019 CFA & FRM

8/8

G. Valuing Bonds with Embedded OptionsH. Structured Products

VIII. Derivatives

A. Types of Derivative Instruments and Their CharacteristicsB. Forward Markets and InstrumentsC. Futures Markets and InstrumentsD. Options Markets and InstrumentsE. Swaps Markets and InstrumentsF. Credit Derivatives Markets and Instruments

IX. Alternative Investments

A. Types of Alternative Investments and Their CharacteristicsB. Real EstateC. Private Equity/Venture CapitalD. Hedge FundsE. Closely Held Companies and Inactively Traded Securities

F. Distressed Securities/BankruptciesG. CommoditiesH. Tangible Assets with Low Liquidity

X. Portfolio Management and Wealth Planning

A. Portfolio ConceptsB. Management of Individual/Family Investor PortfoliosC. Management of Institutional Investor PortfoliosD. Pension Plans and Employee Benefit FundsE. Investment Manager Selection

F. Other Institutional InvestorsG. Mutual Funds, Pooled Funds, and ETFsH. Economic Analysis and Setting Capital Market ExpectationsI. Tax EfficiencyJ. Asset Allocation (including Currency Overlay)K. Portfolio Construction and RevisionL. Equity Portfolio Management StrategiesM. Fixed-Income Portfolio Management StrategiesN. Alternative Investments Management StrategiesO. Risk ManagementP. Execution of Portfolio Decisions (Trading)

Q. Performance EvaluationR. Presentation of Performance Results