Foundations of Risk Management_2020_Schweser_Notes_Part_I_Book_1

Document Content and Description Below

WELCOME TO THE 2020 SCHWESERNOTES™ Thank you for trusting Kaplan Schweser to help you reach your career and educational goals. We are very pleased to be able to help you prepare for the FRM Part ... I exam. In this introduction, I want to explain the resources included with the SchweserNotes, suggest how you can best use Kaplan Schweser materials to prepare for the exam, and direct you toward other educational resources you will find helpful as you study for the exam. Besides the SchweserNotes themselves, there are many online educational resources available at Schweser.com. Just log in using the individual username and password that you received when you purchased the SchweserNotes. SchweserNotes™ The SchweserNotes™ consist of four volumes that include complete coverage of all FRM assigned readings and learning objectives, as well as module quizzes (multiple-choice questions for every reading) to help you master the material and check your retention of key concepts. Practice Questions To retain what you learn, it is important that you quiz yourself often. We offer an online version of the SchweserPro™ QBank, which contains hundreds of Part I practice questions and explanations. We also offer topic assessment questions and checkpoint exams online to further help you retain and apply what you have learned. Practice Exams Schweser offers two full 4-hour, 100-question practice exams. These exams are important tools for gaining the speed and skills you will need to pass the exam. The Practice Exams book contains answers with full explanations for self-grading and evaluation. Online Weekly Class Our Online Weekly Class is offered each week, beginning in February for the May exam and August for the November exam. This online class brings the personal attention of a classroom into your home or office with 30 hours of real-time instruction, led by Martin Stoynov, CFA, CAIA, FRM. The class offers in-depth coverage of difficult concepts, instant feedback during lecture and Q&A sessions, and discussion of sample exam questions. Archived classes are available for viewing at any time throughout the season. Candidates enrolled in the Online Weekly Class also have the ability to email questions to the instructor at any time.©2020 Kaplan, Inc. Page ix Welcome to the 2020 SchweserNotes™ Late-Season Review Late-season review and exam practice can make all the difference. Our Final Review Package helps you evaluate your exam readiness with products specifically designed for late-season studying. This study package includes the Online Review Workshop (8-hour live and archived online review of essential curriculum topics), the Schweser Mock Exam (one 4-hour exam), and Schweser’s Secret Sauce (concise summary of the FRM curriculum). Part I Exam Weightings In preparing for the exam, pay attention to the weights assigned to each topic area within the curriculum. The Part I exam weights are as follows: Book Topic Areas Exam Weight Exam Questions 1 Foundations of Risk Management 20% 20 2 Quantitative Analysis 20% 20 3 Financial Markets and Products 30% 30 4 Valuation and Risk Models 30% 30 How to Succeed The FRM Part I exam is a formidable challenge (covering 60 assigned readings and almost 500 learning objectives), so you must devote considerable time and effort to be properly prepared. There are no shortcuts! You must learn the material, know the terminology and techniques, understand the concepts, and be able to answer 100 multiple-choice questions quickly and (at least 70%) correctly. A good estimate of the study time required is 250 hours on average, but some candidates will need more or less time, depending on their individual backgrounds and experience. Expect the Global Association of Risk Professionals (GARP) to test your knowledge in a way that will reveal how well you know the Part I curriculum. You should begin studying early and stick to your study plan. You should first read the SchweserNotes and complete the practice questions for each reading. After completing each topic area, you should answer the provided topic assessment questions to understand how concepts may be tested on the exam. It is recommended that you finish your initial study of the entire curriculum at least two weeks (earlier if possible) prior to your exam date to allow sufficient time for practice and targeted review. During this period, you should take all the Schweser Practice Exams. This final review period is when you will get a clear indication of how effective your study efforts have been and which topic areas require significant additional review. Practice answering exam-like questions across all readings and working on your exam timing will be important determinants of your success on exam day. Best regards, Eric Smith Eric Smith, CFA, FRM Content Manager Kaplan SchweserPage x ©2020 Kaplan, Inc. Learning Objectives and Reading Assignments LEARNING OBJECTIVES AND READING ASSIGNMENTS 1. The Building Blocks of Risk Management Global Association of Risk Professionals. Foundations of Risk Management. New York, NY: Pearson, 2019. Chapter 1. After completing this reading, you should be able to: a. explain the concept of risk and compare risk management with risk taking. (page 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. (page 2) c. evaluate and apply tools and procedures used to measure and manage risk, including quantitative measures, qualitative assessment and enterprise risk management. (page 4) d. distinguish between expected loss and unexpected loss and provide examples of each. (page 6) e. interpret the relationship between risk and reward and explain how conflicts of interest can impact risk management. (page 7) 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. (page 9) g. explain how risk factors can interact with each other and describe challenges in aggregating risk exposures. (page 13) 2. How Do Firms Manage Financial Risk? Global Association of Risk Professionals. Foundations of Risk Management. New York, NY: Pearson, 2019. Chapter 2. After completing this reading, you should be able to: 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. (page 21) b. explain the relationship between risk appetite and a firm’s risk management decisions. (page 23) c. evaluate some advantages and disadvantages of hedging risk exposures and explain challenges that can arise when implementing a hedging strategy. (page 26) d. apply appropriate methods to hedge operational and financial risks, including pricing, foreign currency and interest rate risk. (page 30) e. assess the impact of risk management tools and instruments, including risk limits and derivatives. (page 32) 3. The Governance of Risk Management Global Association of Risk Professionals. Foundations of Risk Management. New York, NY: Pearson, 2019. Chapter 3. After completing this reading, you should be able to: a. explain changes in corporate risk governance that occurred as a result of the 2007-2009 financial crisis. (page 40) b. compare and contrast best practices in corporate governance with those of risk management. (page 44) c. assess the role and responsibilities of the board of directors in risk governance. (page 46) d. evaluate the relationship between a firm’s risk appetite and its business strategy, including the role of incentives. (page 48) e. illustrate the interdependence of functional units within a firm as it relates to risk management. (page 49) f. assess the role and responsibilities of a firm’s audit committee. (page 50)©2020 Kaplan, Inc. Page xi Learning Objectives and Reading Assignments 4. Credit Risk Transfer Mechanisms Global Association of Risk Professionals. Foundations of Risk Management. New York, NY: Pearson, 2019. Chapter 4. After completing this reading, you should be able to: a. compare different types of credit derivatives, explain how each one transfers credit risk and describe their advantages and disadvantages. (page 57) b. explain different traditional approaches or mechanisms that firms can use to help mitigate credit risk. (page 60) 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. (page 61) 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. (page 62) 5. Modern Portfolio Theory and Capital Asset Pricing Model Global Association of Risk Professionals. Foundations of Risk Management. New York, NY: Pearson, 2019. Chapter 5. After completing this reading, you should be able to: a. explain modern portfolio theory and interpret the Markowitz efficient frontier. (page 67) b. understand the derivation and components of the CAPM. (page 73) c. describe the assumptions underlying the CAPM. (page 71) d. interpret the capital market line. (page 70) e. apply the CAPM in calculating the expected return on an asset. (page 75) f. interpret beta and calculate the beta of a single asset or portfolio. (page 72) 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. (page 77) 6. The Arbitrage Pricing Theory and Multifactor Models of Risk and Return Global Association of Risk Professionals. Foundations of Risk Management. New York, NY: Pearson, 2019. Chapter 6. After completing this reading, you should be able to: a. explain the arbitrage pricing theory (APT), describe its assumptions and compare the APT to the CAPM. (page 87) b. describe the inputs (including factor betas) to a multifactor model. (page 89) c. calculate the expected return of an asset using a single-factor and a multifactor model. (page 90) d. explain models that account for correlations between asset returns in a multi-asset portfolio. (page 91) e. explain how to construct a portfolio to hedge exposure to multiple factors. (page 92) f. describe and apply the Fama-French three-factor model in estimating asset returns. (page 93) 7. Principles for Effective Data Aggregation and Risk Reporting Global Association of Risk Professionals. Foundations of Risk Management. New York, NY: Pearson, 2019. Chapter 7. After completing this reading, you should be able to: a. explain the potential benefits of having effective risk data aggregation and reporting. (page 99) b. describe the impact of data quality on model risk and the model development process. (page 100) c. describe key governance principles related to risk data aggregation and risk reporting practices. (page 101)Page xii ©2020 Kaplan, Inc. Learning Objectives and Reading Assignments d. identify the governance framework, risk data architecture and IT infrastructure features that can contribute to effective risk data aggregation and risk reporting practices. (page 101) e. describe characteristics of a strong risk data aggregation capability and demonstrate how these characteristics interact with one another. (page 105) f. describe characteristics of effective risk reporting practices. (page 107) g. describe the role that supervisors play in the monitoring and implementation of the risk data aggregation and reporting practices. (page 111) 8. Enterprise Risk Management and Future Trends Global Association of Risk Professionals. Foundations of Risk Management. New York, NY: Pearson, 2019. Chapter 8. After completing this reading, you should be able to: a. describe Enterprise Risk Management (ERM) and compare an ERM program with a traditional silo-based risk management program. (page 117) b. compare the benefits and costs of ERM and describe the motivations for a firm to adopt an ERM initiative. (page 119) c. explain best practices for the governance and implementation of an ERM program. (page 119) d. describe important dimensions of an ERM program and relate ERM to strategic planning. (page 120) 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. (page 122) f. explain the role of scenario analysis in the implementation of an ERM program and describe its advantages and disadvantages. (page 124) g. explain the use of scenario analysis in stress testing programs and in capital planning. (page 125) 9. Learning from Financial Disasters Global Association of Risk Professionals. Foundations of Risk Management. New York, NY: Pearson, 2019. Chapter 9. After completing this reading, you should be able to: 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 (page 133) 10. Anatomy of the Great Financial Crisis of 2007-2009 Global Association of Risk Professionals. Foundations of Risk Management. New York, NY: Pearson, 2019. Chapter 10. After completing this reading, you should be able to: a. describe the historical background and provide an overview of the 2007-2009 financial crisis. (page 153) b. describe the build-up to the financial crisis and the factors that played an important role. (page 153)©2020 Kaplan, Inc. Page xiii Learning Objectives and Reading Assignments c. explain the role of subprime mortgages and collateralized debt obligations (CDOs) in the crisis. (page 154) d. compare the roles of different types of institutions in the financial crisis, including banks, financial intermediaries, mortgage brokers and lenders and rating agencies. (page 154) e. describe trends in the short-term wholesale funding markets that contributed to the financial crisis, including their impact on systemic risk. (page 156) f. describe responses taken by central banks in response to the crisis. (page 157) 11. GARP Code of Conduct Global Association of Risk Professionals. Foundations of Risk Management. New York, NY: Pearson, 2019. Chapter 11. After completing this reading, you should be able to: 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. (page 162) b. describe the potential consequences of violating the GARP Code of Conduct. (page 164)READING The Building Blocks of Risk 1 Management The following is a review of the Foundations of Risk Management principles designed to address the learning objectives set forth by GARP®. Cross reference to GARP FRM Part I Foundations of Risk Management, Chapter 1. ©2020 Kaplan, Inc. Page 1 EXAM FOCUS This introductory reading provides coverage of fundamental risk management concepts that will be discussed in much more detail throughout the FRM curriculum. For the exam, it is important to understand the general risk management process and its potential shortcomings, the concept of unexpected loss, and some of the underlying points regarding the relationship between risk and reward. Also, the material on the main categories of financial and nonfinancial risks contains several testable concepts. MODULE 1.1: INTRODUCTION TO RISK MANAGEMENT - - - - - - - Continued [Show More]

Last updated: 3 years ago

Preview 1 out of 74 pages