FRM Parr I Book 1: FouNDATIONS OF Risk MANAGEMEN’ InrRODUCTION TO THE 2012 KAPLAN ScHwesER Stupy Nores GARP 2012 FRM Parr I Stupy Guive Founpatrons or Risk MANAGEMENT 1: The Need for Risk Management 2: Delineating Efficient Portfolios 3: The Standard Capital Asset Pricing Model 4; Nonstandard Forms of Capital Asset Pricing Models 5: The Arbitrage Pricing Model APT—A New Approach to Explaining Asset Prices 6: Applying the CAPM co Performance Measurement: Single-Index Performance Measurement Indicators 7: Overview of Enterprise Risk Management 8: Creating Value with Risk Management 9: Financial Disasters 10: Risk Management Failures: What Are They and When Do They Happen? 11: GARP Code of Conduct (CHALLENGE PROBLEMS CHALLENGE PROBLEM ANSWERS GARP FRM Practice Exam Questions GARP FRM Practice Exam ANswERs Formutas APPENDIX Inpex ‘G2012 Kaplan, Ine 2 4 53 62 72 84 94 102 125 Bz B4 143 450 152 155Page 2 FRM PART I BOOK 1: FOUNDATIONS OF RISK MANAGEMENT (©2012 Kaplan, Inc, dba. Kaplan Schweser Al sights reserved, Printed inthe United Seate of America ISBN: 978-1-4277-3880-6 /1-4277-3880-7 PPN: 3200-2107 Required Disclaimers GARP® does not endorse, promote, review, or warrant che accuracy of the products oF services offered by Kaplan Schweser of FRM? related information, nor does it endorse any pas rates claimed. by the provider Further, GARP® is not responsible for any fees or costs paid by the usce to Kaplan Schweser, nor is GARP® responsible for any fes or costs of any person or entity providing any services to Kaplan Schyseser. FRM®, GARP, and Global Association of Rsk Professionals” are trademarks ovmed by the Global Associaton of Risk Professional, Inc. GARP FRM Practice Exam Questions are reprinted with permission. Copyright 2011, Global Association of Risk Professionals. All ight rexerved, ‘These materials may not be copied without written permission from the author. The unauthorized duplication ofthese notes is a violation of global copyright laws, Your assistance in pursuing potential violators ofthis law is satly appreciated, Disclaimer: The Study Notes should be used in conjunction with the original readings as st forth by GARP®. ‘The information contained in these Seudy Notes is based on the original readings and is believed to be accurate. However, chit accuracy cannor be guaranteed nore any wartanty conveyed 2s 2 your ultimate exam succes.INTRODUCTION TO THE 2012 Kapitan SCHWESER Stupy NorEs FRM Exam Part I ‘Thank you for trusting Kaplan Schweser to help you reach your career and education, goals. We are very pleased to be able to help you prepare for the 2012 FRM Exam. In this introduction, I want to explain what is included in the Study Notes, 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. Study Noies—A 4-book ser that includes complete coverage of all risk-relaced topic areas and AIM statements, as well as Concept Checkers (multiple-choice questions for every assigned reading) and Challenge Problems (exam-like questions). In addition, the Study Notes include background material for a number of key FRM-related concepts (these background readings supplement the curriculum). At the end of each book, we have included relevant questions from past GARP FRM practice exams. These old exam questions are a great tool for understanding the format and difficulty of acrual exam questions, To help you master the FRM material and be well prepared for the exam, we offer several additional educational resources, including: 8-Week Online Class—Live online program (eight 3-hour sessions) that is offered each week, beginning in March for the May exam and September for the November exam. The online class brings the personal attention of a classroom into your home or office with 24 hours of real-time instruction led by either Dr. John Paul Broussard, CFA, FRM, PRM or Dr. Greg Filbeck, CFA, FRM, CAIA. The class offers in-depth coverage of difficult concepts, instant feedback during lecture and Q&A sessions, and discussion of past FRM exam questions. Archived classes are available for viewing at any time throughout the study season. Candidates enrolled in the Online Class also have access to downloadable slide files, and Instructor E-mail Access, where they can send questions «9 the instructor at any time. IF you have purchased the Schweser Study Notes as part of the Essential, Premium, or PremiumPlus Solution, you will also receive access to Instructor-led Office Hours. Office Hours allow you to get your FRM-related questions answered in real time and view questions from other candidates (and faculty answers) as well. Office Hours is a text-based, live, interactive, online chat with the weekly online class instructor. Archives of previous Instructor-led Office Hours sessions are sorted by topic and ate posted shortly after each session. Practice Exams—The Practice Exam Book contains ewo full-length, 100-question (4-hour) exams. These exams are important tools for gaining the speed and confidence you will need to pass the exam. Each exam contains answer explanations for self-grading. Also, by entering your answers at Schweser.com, you can use our Performance Tracker to find out how you have performed compared co other Kaplan Schweser FRM candidates, ‘©2012 Kaplan, Tne. Page 3Introduction to the 2012 Kaplan Schweser Study Notes Page 4 Interactive Study Calendar—Use your Online Access to tell us when you will stare and what days of the week you can study. The Interactive Study Calendae will create a study plan just for you, breaking each topic area into daily and weekly tasks to keep you on track and help you monitor your progress through the FRM curriculum. Online Question Database—In order to retain what you learn, itis important chat you quiz yourself often. We offer download and online versions of our FRM SchweserPro Qbank, which contains over 1,000 practice questions and explanations for Part I of the FRM Program, In addition to these study products, there are many educational resources available at Schweser.com, including the FRM Video Library and the FRM Exam-tips Blog, Just log into your account using the individual username and password that you received when you purchased the Schweser Study Notes. How to Succeed The ERM exam is a formidable challenge, and you must devote considerable time and effort co be properly prepared. You must learn the material, know the terminology and techniques, understand the concepts, and be able to answer at least 70% of the questions quickly and correctly. 250 hours is a good estimate of the study time required on average, but some candidates will need more ot les time depending on their individual backgrounds and experience. To provide you with an overview of the FRM Part I curriculum, we have included alist of all GARP assigned readings in the order chey appear in our Study Notes. Every topic in our Notes is cross-referenced to an FRM assigned reading, so should you require additional clarification with certain concepts, you can consult the appropriate assigned reading There are no shortcuts to studying for this exam. Expect GARD to test you in a way that will reveal how well you know the FRM curriculum. You should begin studying early and stick to your study plan. You should first read the Study Notes and complete the Concept Checkers for each topic. Ar the end of each book, you should answer the provided Challenge Problems and practice exam questions to understand how concepts have been tested in the past. You can also attend our 8-Week Online Class to assist with retention of the exam concepts. You should finish the overall curriculum at least rwo weeks before che FRM exam. This will allow sufficient time for Practice Exams and further review of those topics that you have not yet mastered. Best wishes for your studies and your continued success, Erie Smut Eric Smith, CEA, FRM Senior Project Manager Kaplan Schweser ©2012 Kaplan, Inc.GARP 2012 FRM Parr I Srupy GuIpE FounpaTIons OF Risk MANAGEMENT Part I Exam Weight: 20% Philippe Jorion, Value-at-Risk: The New Benchmark for Managing Financial Risk, 3rd Edition (New York: McGraw-Hill, 2007) 1: Chapter 1 ~The Need for Risk Management Edwin J. Elon, Marcin J. Gruber, Stephen J. Brown and William N. Goetzmann, Modern Porsfolio Theory and Investment Analysis, 8th Edition (Hoboken, NJ: John Wiley & Sons, 2009). 2: Chapter 5 ~ Delineating Efficient Portfolios 3: Chapter 13 ~The Standard Capital Asset Pricing Model 4: Chapter 14 ~ Nonstandard Forms of Capital Asset Pricing Models 5: Chapter 16 ~The Arbitrage Pricing Model APT — A New Approach to Explaining Asset Prices Noel Amenc and Veronique Le Sourd, Porifalio Theory and Performance Analysis (West Sussex, England: John Wiley & Sons, 2003). 6 Chapter 4 — Applying the CAPM to Performance Measurement: Single-Index Performance Measurement Indicators 7: Casualty Actuarial Society, Enterprise Risk Management Committee, “Overview of Enterprise Risk Management,” May 2003. René M. Stulz, Risk Management & Derivatives (Florence, KY: Thomson South-Western, 2002). 8: Chapter 3 ~ Creating Value with Risk Management ‘©2012 Kaplan, Ine Page 5