The FRM Exam Part I Syllabus aims to build a strong foundation to help candidates understand and appreciate concepts in Financial Risk Management. The format of the exam is 100 multiple choice questions (no negative marking) to be completed in a time frame of 4 hours. The Part I syllabus lends itself more naturally to numerical based questions, so practice should form a key element of your preparation strategy. Topics covered in this Part are categorized into four sections outlined below (along with their respective weightages).
Section 1: Quantitative Analysis (Weightage: 20%)
This section introduces various quantitative techniques. Spanning around 13 readings, topics include probability, random variables, distributions, statistical inference and hypothesis testing, econometrics, time series analysis and numerical methods (e.g. simulation methods, volatility and correlation). Although relatively underweighted at 20%, it is an extremely important section as it underpins other sections of Part I and Part II curriculum. Preparation strategy should involve reading up these topics from the right source (not summarized notes) and lots of practice.
NB: The updated curriculum for 2023 now includes two new readings on machine learning. The first one titled “Machine Learning Methods” details the various ways data can be prepared for machine-learning applications and distinguishes among the types of machine-learning models, while second one titled “Machine Learning and Prediction” presents several leading supervised machine-learning models used for classification and prediction problems.
Section 2: Foundations of Risk Management (Weightage: 20%)
This section introduces you to Financial Risk Management – risk terminology, risk categories and types. Spanning a set of around 11 readings, this section also exposes candidates to value creation through risk management and financial disasters that have their roots in the lack of or misguided applications of risk management principles. Readings also focus on basics of finance theory (analysis and evaluation of securities in portfolio context, performance evaluation and arbitrage pricing theory) for benefit of candidates who do not have prior exposure to these topics. Barring these readings, this section is relatively light on formulas and more focused on providing you with a big picture view of the risk management function.
Section 3: Financial Markets and Products (Weightage: 30%)
The most voluminous section of the four, this section is worthy of a bigger allocation of your preparation time. It spans around 20 readings that cover topics in mechanics of OTC and exchange markets, introduction to various instruments (features, payoffs, pricing) and their applications (hedging and trading strategies). These readings truly form the foundation of Part II – only if these financial products are mastered fully will the candidate be able to understand and appreciate the risks (market risk, credit risk, model risk) stemming from their use. Again, preparation strategy should involve picking the right source for mastering the concepts, backed strongly with practice.
Section 4: Valuation and Risk Models (Weightage: 30%)
This section builds on the three sections above and it’s 16 readings can be effectively split into two sub-categories- a) Valuation b) Risk Management. The valuation subsection takes you through valuation methods for options (binomial trees, closed form models like Black Scholes along with calculation of sensitivities or ‘greeks’) and for fixed income securities (including estimating single factor and multi factor risk sensitivities). The risk management sub-section includes readings that introduce you to types of risk (credit risk, operational risk) and to risk measures used for quantifying risk (VaR, Estimated Shortfall, Stress Testing). This sub-section should give the candidate a true flavor of what lies ahead in Part II. Since this section is highly conceptual and relatively overweighted at 30%, preparation strategy should include adequate time spent on achieving a thorough understanding of all topics.
Making the most of your Part I preparation
In order to achieve the most of your Part I preparation efforts, it is critical to formulate a study plan and stick to it. Your plan should appropriately weigh each of above sections in terms of their relative difficulty and weightage in exam. Additionally (and importantly), your plan should arrange all readings in Part I in a sequence that builds your concepts in a natural, seamless and structured way. One such sequence is highlighted in the video below:
The finRGB preparation course for FRM combines together various resources – instructional videos, reading material, concept application via quizzes and instructor support. Please follow the link below to view course details: