2024 FINANCIAL RISK

MANAGER (FRM)
EXAM STUDY GUIDE
Topic Outline, Readings, and Test Weightings

The Study Guide sets forth primary topics and sub-topics covered in the FRM Exams Part I and Part II. The topics were
selected by the FRM Committee as essential for today’s risk managers to master. The topics and their respective weightings
are reviewed yearly to ensure the Exams are timely and relevant. The Study Guide also contains a full listing of all the readings
that are recommended as preparation for the FRM Exams Part I and Part II.

Key concepts appear as bullet points at the beginning of each section and are intended to help candidates identify the major
themes and knowledge areas associated with that section.

FRM Exam Approach

The FRM Exams are practice oriented. The questions are based on both theory, as set forth in the readings, and real-world
applications. Candidates are expected to understand risk management concepts and approaches, as well as how they would
apply to a risk manager’s day-to-day activities. It is rare that a risk manager will be faced with an issue that can immediately be
slotted into one category. In the real world, a risk manager must be able to identify any number of risk-related issues and deal
with them effectively.

As such, the Exams are comprehensive in nature, testing a candidate on a number of risk management concepts
and approaches.

Readings

Questions for the FRM Exams are related to and supported by the readings listed under each topic outline. These readings
were selected by the FRM Committee to assist candidates in their review of the subjects covered by the Exams. It is strongly
suggested that candidates review these readings in depth prior to sitting for each Exam. All of the readings listed in the FRM
Study Guide are available through GARP. Further information can be found on the GARP website.

FRM Exam Preparation Providers

Some candidates may want to review more formally the materials with FRM Exam Preparation Providers (EPPs). A list of EPPs
that have registered with GARP can be found on the GARP website. GARP does not endorse any EPP, but merely lists them
as a service to FRM candidates.

On the following pages, an asterisk after a reading indicates that the reading is freely available on the GARP website.

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FRM EXAM
PART I
FOUNDATIONS OF RISK MANAGEMENT

QUANTITATIVE ANALYSIS

FINANCIAL MARKETS AND PRODUCTS

VALUATION AND RISK MODELS

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FOUNDATIONS OF
RISK MANAGEMENT
PART I EXAM WEIGHT | 20%

Topics and Readings

This area focuses on foundational concepts of risk management and how risk management can add value to an organization.
The broad knowledge points covered in Foundations of Risk Management include the following:

• Basic risk types, measurement, and management tools

• Creating value with risk management
• Risk governance and corporate governance
• Credit risk transfer mechanisms
• The Capital Asset Pricing Model (CAPM)
• Risk-adjusted performance measurement
• Multifactor models
• Data aggregation and risk reporting
• Financial disasters and risk management failures
• Ethics and the GARP Code of Conduct
• Enterprise risk management (ERM)

A proprietary book for FRM candidates has been created to cover these broad knowledge points. While detailed learning
objectives associated with these readings are presented in the 2024 FRM Learning Objectives document, a brief summary of
how to relate these readings to the knowledge points follows.

Chapters 1 and 2 explore different risk types, how risks can arise in an organization, and how firms manage financial risks.
Chapter 3 describes the role of corporate governance in risk management, including the role of the board of directors and other
areas of an organization. The concept of risk appetite and how it is translated into a risk appetite framework and communicated
throughout an organization is presented as well in this chapter.

Chapter 4 presents an overview of credit risk transfer mechanisms, including credit derivatives and securitization, and
discusses issues with the securitization of subprime mortgages. Chapter 5 presents Modern Portfolio Theory (MPT) and the
CAPM, one of the foundational developments in risk-adjusted pricing and valuation. Chapter 6 explains how the Arbitrage
Pricing Theory (APT) and factor models can be used to model returns on investment assets.

Data is the lifeblood of many large financial organizations, and aggregating and reporting risk data have become increasingly
important. Chapter 7 addresses this topic. Chapter 8 introduces enterprise risk management (ERM), a commonly used method
for assessing and managing risk in an organizational context, and discusses its future trends.

As it is always important to learn from historical experience, Chapter 9 describes various financial disasters from the past, and
Chapter 10 focuses on the financial crisis of 2007-2009.

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To help ensure ethical standards are upheld in the risk management profession, Chapter 11 contains GARP’s Code of Conduct,
which applies to all candidates and those who complete FRM Certification.

Readings for Foundations of Risk Management

All Foundations of Risk Management curated readings are contained in GARP’s proprietary Foundations of Risk Management
book. The contents of this book are as follows:

• Chapter 1. The Building Blocks of Risk Management

• Chapter 2. How Do Firms Manage Financial Risk?
• Chapter 3. The Governance of Risk Management
• Chapter 4. Credit Risk Transfer Mechanisms
• Chapter 5. Modern Portfolio Theory and Capital Asset Pricing Model
• Chapter 6. The Arbitrage Pricing Theory and Multifactor Models of Risk and Return
• Chapter 7. Principles for Effective Data Aggregation and Risk Reporting
• Chapter 8. Enterprise Risk Management and Future Trends
• Chapter 9. Learning from Financial Disasters
• Chapter 10. Anatomy of the Great Financial Crisis of 2007-2009
• Chapter 11. GARP Code of Conduct*

* This reading is freely available on the GARP website

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QUANTITATIVE
ANALYSIS
PART I EXAM WEIGHT | 20%

Topics and Readings

This area focuses on basic probability and statistics, regression and time series analysis, and various quantitative techniques
useful in risk management. The broad knowledge points covered in Quantitative Analysis include the following:

• Discrete and continuous probability distributions

• Estimating the parameters of distributions
• Population and sample statistics
• Bayesian analysis
• Statistical inference and hypothesis testing
• Measures of correlation
• Linear regression with single and multiple regressors
• Time series analysis and forecasting
• Simulation methods
• Machine learning

A proprietary book for FRM candidates has been created to cover these broad knowledge points. While detailed learning
objectives associated with these readings are presented in the 2024 FRM Learning Objectives document, a brief summary of
how to relate these readings to the knowledge points follows.

Chapters 1 through 6 introduce fundamental concepts related to probability, statistics, probability distributions, Bayesian
analysis, hypothesis testing, and confidence intervals.

Regression analysis is an important statistical tool used to investigate relationships between variables. Chapters 7 and 8
give a general introduction to single and multivariate linear regression analysis. Chapter 9 examines model specification and
explores how potential deficiencies in model specification can be identified through conducting standard specification checks,
which include the use of residual diagnostics and tests of statistical hypotheses.

Time series data occur frequently in finance. The next two chapters describe methods for analyzing time series data in order
to estimate statistics, extract meaningful data characteristics, and produce forecasts of future values. Chapter 10 focuses on
modeling stationary time series, while Chapter 11 discusses the modeling of non-stationary time series.

Dependence and variation are important subjects in risk management. Chapter 12 introduces volatility, correlation,
and returns, as well as the properties of these three measures in the context of both normally and non-normally
distributed variables.

Simulation methods are used to value and analyze complex financial instruments and portfolios. Chapter 13 introduces two

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closely related simulation methods, Monte Carlo simulation and bootstrapping, and outlines some of their applications. It
also explains the advantages and disadvantages of using simulations and the techniques employed to reduce Monte Carlo
sampling error.

The last two chapters introduce machine learning as an alternative approach to traditional model-building techniques tackled
in the previous chapters and highlight its growing applications in finance. Chapter 14 details the various ways data can be
prepared for machine learning applications and distinguishes among the types of machine learning models, while Chapter 15
presents several leading supervised machine learning models used for classification and prediction problems.

Readings for Quantitative Analysis

All Quantitative Analysis readings are contained in GARP’s proprietary Quantitative Analysis book. The contents of this book
are as follows:

• Chapter 1. Fundamentals of Probability

• Chapter 2. Random Variables
• Chapter 3. Common Univariate Random Variables
• Chapter 4. Multivariate Random Variables
• Chapter 5. Sample Moments
• Chapter 6. Hypothesis Testing
• Chapter 7. Linear Regression
• Chapter 8. Regression with Multiple Explanatory Variables
• Chapter 9. Regression Diagnostics
• Chapter 10. Stationary Time Series
• Chapter 11. Non-stationary Time Series
• Chapter 12. Measuring Returns, Volatility, and Correlation
• Chapter 13. Simulation and Bootstrapping
• Chapter 14. Machine Learning Methods
• Chapter 15. Machine Learning and Prediction

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FINANCIAL MARKETS
AND PRODUCTS
PART I EXAM WEIGHT | 30%

Topics and Readings

This area focuses on financial products and the markets in which they trade, more specifically, the following knowledge areas:

• Structure and functions of financial institutions

• Structure and mechanics of over-the-counter (OTC) and exchange markets
• Structure, mechanics, and valuation of forwards, futures, swaps, and options
• Hedging with derivatives
• Interest rates and measures of interest rate sensitivity
• Foreign exchange risk
• Corporate bonds
• Mortgage-backed securities (MBS)

To cover these broad knowledge points, a proprietary book has been created exclusively for FRM candidates. While detailed
learning objectives associated with these readings are presented in the 2024 FRM Learning Objectives document, a brief
summary of how to relate these readings to the knowledge points follows.

The first chapter describes the structure of commercial and investment banking, the way banks are regulated, the nature
of risks they face, the role of capital in providing cushion against losses, and the securitization process for MBS. Chapter 2
explains the risks and regulations faced by insurance companies, their capital requirements, and performance ratios, as well
as the types and key characteristics of pension funds. Chapter 3 introduces mutual funds, exchange-traded funds, and hedge
funds, and describes various hedge fund strategies and performance measures.

Financial derivatives play a key role in risk management. Chapter 4 describes options, forwards, and futures along with the
derivatives markets and the risks faced by market participants. The exchange-traded and OTC markets are explained in
Chapter 5. Chapter 6 describes the structures and operations of central counterparties (CCPs), and the types of risks faced by
CCPs. Chapters 7 and 8 explain the mechanics of futures markets and how futures are used for hedging. Chapter 9 describes
the foreign exchange markets and explains methods for estimating foreign exchange risk, multicurrency hedging strategies
using options, the determination of exchange rates, and the covered interest rate parity theorem.

Chapters 10 and 11 provide deeper coverage of financial forwards and futures, including their pricing and the determination
of no-arbitrage values for commodity forwards and futures. The following four chapters (12 through 15) examine options and
their use in risk management, including the properties of different options, option market mechanics, multi-option and hedging
strategies, and different exotic options.

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Interest rates and two important classes of fixed income securities are covered in the next three chapters. Chapter 16
describes properties of interest rates and explains bond valuation, duration, and convexity, the pricing of forward rate
agreements, and the theories of term structure. Chapter 17 describes corporate bonds, their types and characteristics, and
credit ratings. Chapter 18 defines mortgages, explains the valuation of MBS pools, prepayment modeling, and calculations of
mortgage pool metrics.

The last two chapters examine two additional derivative instruments. Chapter 19 describes interest rates and Treasury bonds
in relation to forward and futures prices, along with the use of interest rate futures in hedging. The mechanics, types, and the
pricing of swaps contracts used for hedging are described in Chapter 20.

Readings for Financial Markets and Products

All Financial Markets and Products readings are contained in GARP’s proprietary Financial Markets and Products book. The
contents of this book are as follows:

• Chapter 1. Banks
• Chapter 2. Insurance Companies and Pension Plans
• Chapter 3. Fund Management
• Chapter 4. Introduction to Derivatives
• Chapter 5. Exchanges and OTC Markets
• Chapter 6. Central Clearing
• Chapter 7. Futures Markets
• Chapter 8. Using Futures for Hedging
• Chapter 9. Foreign Exchange Markets
• Chapter 10. Pricing Financial Forwards and Futures
• Chapter 11. Commodity Forwards and Futures
• Chapter 12. Options Markets
• Chapter 13. Properties of Options
• Chapter 14. Trading Strategies
• Chapter 15. Exotic Options
• Chapter 16. Properties of Interest Rates
• Chapter 17. Corporate Bonds
• Chapter 18. Mortgages and Mortgage-Backed Securities
• Chapter 19. Interest Rate Futures
• Chapter 20. Swaps

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VALUATION AND
RISK MODELS
PART I EXAM WEIGHT | 30%

Topics and Readings

This area focuses on valuation techniques and risk models. The broad knowledge points covered in Valuation and Risk Models
include the following:

• Value-at-risk (VaR)
• Expected shortfall (ES)
• Estimating volatility and correlation
• Economic and regulatory capital
• Stress testing and scenario analysis
• Option valuation
• Fixed-income valuation
• Hedging
• Country and sovereign risk models and management
• External and internal credit ratings
• Expected and unexpected losses
• Operational risk

To cover these broad knowledge points, a proprietary book has been created exclusively for FRM candidates. While detailed
learning objectives associated with these readings are presented in the 2024 FRM Learning Objectives document, a brief
summary of how to relate these readings to the knowledge points follows.

The first three chapters introduce financial risk measures and models. Chapter 1 examines measures of financial risk and
describes measurement frameworks such as the mean-variance approach, VaR, and ES. Chapter 2 covers VaR and ES
estimation approaches and applications. Chapter 3 discusses the calculation and monitoring of volatility used in the VaR and
ES models.

The next three chapters introduce credit risk. Chapter 4 describes credit ratings and presents a review of external and internal
rating methodologies, along with their relative strengths and weaknesses. Chapter 5 explains specific sources of country
risk and the use of external ratings in assessing sovereign default risk. Chapter 6 covers the basics of credit risk, specifically
expected loss (EL) and unexpected loss (UL), for both individual assets and portfolios, and describes default risk models such
as the Gaussian copula model, the Vasicek model, and CreditMetrics.

Chapter 7 introduces aspects of operational risk and discusses various approaches for determining capital for operational risk.
Stress testing, its importance, applications, and practices are explained in Chapter 8.

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Chapters 9 through 13 focus on risk management for fixed-income securities. Chapters 9 through 11 cover the various tools of
fixed-income valuation, while Chapters 12 and 13 explain risk metrics and hedging.

The last three chapters discuss key elements of option pricing and option sensitivities. Chapters 14 and 15 cover option
valuation using binomial trees and the Black-Scholes-Merton model. Chapter 16 presents applications of options for hedging
and risk management.

Readings for Valuation and Risk Models

All Valuation and Risk Models readings are contained in GARP’s proprietary Valuation and Risk Models book. The contents of
this book are as follows:

• Chapter 1. Measures of Financial Risk

• Chapter 2. Calculating and Applying VaR
• Chapter 3. Measuring and Monitoring Volatility
• Chapter 4. External and Internal Credit Ratings
• Chapter 5. Country Risk: Determinants, Measures, and Implications
• Chapter 6. Measuring Credit Risk
• Chapter 7. Operational Risk
• Chapter 8. Stress Testing
• Chapter 9. Pricing Conventions, Discounting, and Arbitrage
• Chapter 10. Interest Rates
• Chapter 11. Bond Yields and Return Calculations
• Chapter 12. Applying Duration, Convexity, and DV01
• Chapter 13. Modeling Non-Parallel Term Structure Shifts and Hedging
• Chapter 14. Binomial Trees
• Chapter 15. The Black-Scholes-Merton Model
• Chapter 16. Option Sensitivity Measures: The “Greeks”

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