FRM Part I case studies
FRM Part I · Put your knowledge to work in context.
FRM Part I is the first level of the Financial Risk Manager (FRM®) certification, a credential that GARP describes as "the mark of excellence in managing financial risk." It is aimed at practitioners who need a rigorous, structured command of how risk is measured, modelled and managed: analysts and associates in market, credit, operational and enterprise risk functions, plus auditors, regulators, consultants and quantitatively trained professionals moving into risk roles. The syllabus is organised into four broad areas - foundations of risk management, quantitative analysis, financial markets and products, and valuation and risk models. The FRM Part I case studies are 5 cases and about 4,576 words.
1Two Managers, One Mandate: Which Added Risk-Adjusted Value?
A $400 million pension fund is reviewing two external managers before renewing mandates. Both are benchmarked to the same broad equity index over the same 60-month period, during which the risk-free rate averaged 3.0%, the index returned 10.0% and index volatility was 15.0%.
805 words, about 4 min2A Regression That Stops Being Significant When the Standard Errors Are Fixed
An analyst at a fund of hedge funds regresses 60 monthly excess returns of a strategy on the excess return of a broad equity index: R strategy = 0.31 + 0.85 × R index, R² = 0.62, n = 60 The software reports a standard error of 0.22 on the slope, giving t = 3.86, and the memo concludes "equity beta is significant at the 1% level." A reviewer reruns the standard errors with a Newey–West correction and obtains 0.45. The Durbin–Watson statistic is 1.15.
860 words, about 4 min3Cutting Beta with Index Futures - and What the Hedge Does Not Do
A portfolio manager runs a 60 million equity portfolio with a beta of 1.25 against the S&P 500 and wants to cut market exposure to 0.80 for the next 12 months without selling stock (large unrealised gains and a lock-up on the underlying holdings). The six-month S&P 500 futures contract trades at 4,200 with a 250 multiplier.
1,002 words, about 5 min4Seven Exceptions in the Yellow Zone: Is the VaR Model Fine?
A bank's internal model produces a 1-day 99% VaR. Over the last 250 trading days there were 7 exceptions (days when the loss exceeded VaR).
1,023 words, about 5 min5Duration Hedging a Treasury Book: The Convexity the CIO Forgot
A fixed-income manager oversees a 100 million Treasury portfolio with modified duration 7.2 and convexity 85. She expects rate cuts, but the CIO has ordered the portfolio's duration hedged to zero for two months ahead of an accounting review.
886 words, about 4 min