The FRM Exam

GARP

The FRM which stands for “Financial Risk Manager” is a designation awarded by GARP (Global Association of Risk Professionals). The qualification is highly respected by risk practitioners and provides candidates with a solid understanding and appreciation for the subject of risk management. Exams are held twice a year in May and December. In this post, I will introduce the exam, talk about some study resources that I used and my experience in obtaining the charter.   Exam Structure The exam is multiple choice and it’ composed of two parts, each one lasting 4 hours. Part 1 consists of 100 multiple choice questions and tests candidates on foundational topics in risk management. Part 2 instead looks to extend the knowledge gained in Part 1 and focuses on the application of these concepts.   Exam Topics and Weights Part 1

  • Foundations of risk management (20%)
  • Quantitative analysis (20%)
  • Financial markets and products (30%)
  • Valuation and risk models (30%)
FRM Pie 1

  Part 2

  • Market risk measurement and management (20%)
  • Credit risk measurement and management (20%)
  • Operational risk and resiliency (20%)
  • Liquidity and treasury risk measurement and management (15%)
  • Risk management and investment management (15%)
  • Current issues in financial markets (10%)
FRM Pie 2

  Please note that the weights have recently changed so if you have been using 2019 material you might want to look at recent changes in topics and weight to give yourself the best chances in passing the exam. The following article does a good job of summarising the changes for part 1.     Pass RatesBionic Turtle provides a table and graph of pass rates from 2010 to 2019. A ten-year average pass rate is calculated from the 20 exams, resulting in an average pass rate of 45.9% for Part 1 and 58.6% for Part 2.   Requirements for FRM Charter Passing both levels and demonstrate two years of relevant work experience to qualify for the designation.   Study Resources In preparing for the exam I used to study resources by the following training providers (please note that I am not affiliated with any of these companies):   Schweser

  • Similar to the CFA materials, the materials are well structured in highlighting the key points
  • A ton of questions and mocks to practice from

Bionic Turtle

  • Videos are very visual and easy to follow
  • Specialised in FRM and questions were of good quality

        Whether training providers are worth it or not, depends on your current background and time commitments. While it’s not impossible to pass the exam with just the official GARP textbooks, training providers will be able to help you focus on passing the exam by focusing on the key topics with short, clear and concise summaries. I personally think training providers provide decent value so if you are able to get any good deals (pass guarantee deals) or if your employer is paying for the material, you should definitely consider using these additional resources.   Difficulty, My Experience, Etc. Similar to any professional financial designation, I would say that the difficulty of the exam is very subjective based on your exposure to the concepts which are covered on the exam and your background. If are completely new to Var, Expected Shortfall and a lot of the basic concepts that pop up on the exam I would put in a solid 200-300 hours   Exam Strategy A lot of the advice that I give in my posts about the CFA exams also applies to the FRM exam. Exam taking techniques are very important in these types of professional qualifications and the most important points can be summarised in the following bullet points:

  • Having a clear strategy for scoring points on the exam: Take a few mock exams and asses your ability and check if your current areas of strength are sufficient to get a pass.
  • Time management before and during the exam: make sure to have a disciplined schedule in preparing for the exam. Bring a watch to the exam and make sure you are pacing yourself to avoid running out of time.
  • Eat healthy, exercise and stay in good shape to ensure your study hours are productive.
  • Enjoy the journey.

Some questions/remarks that I come across very often about this exam   Isn’t the maths on the exam very advanced? A lot of the statistics and probability on the exam might be intimidating depending on your background but I don’t think the maths tested on the exam constitutes a barrier in taking the exam. In my opinion, a lot of the concepts that are tested look for a general understanding from a generalist practitioner’s perspective.   How long do you need to prepare for the Exam? If you are a financial professional or a student who has already had a lot of exposure to the topics that are covered, I think 100-200 hours (per level) are a good estimate.   Should I take both levels 1 and 2 in a single sitting? It will depend on the time and dedication that you can afford to spend on this exam. I personally recommend taking levels 1 and 2 on different sittings (which is what I did) but if are scoring solidly on the mocks and you feel ambitious enough then go for it. However please be aware that if you were to pass level 2 but fail level 1 you would have to re-take level 2 which is not ideal.   Job Prospects I guess this is a very important point that a lot of prospective candidates are interested in. I can speak based on my 10+ years of experience in the financial sector and having been both a hiring manager and an applicant.  

  • I don’t think the exam holds the same weight as the CFA Charter or a master’s in financial engineering or Risk related subject from a prestigious uni. Also compare to the CFA, which is broader, people have the perception that FRM is only limited to risk management (to a certain extent they are correct).
  • Within Risk or Risk related areas, the qualification holds a solid weight and proves to employers that the candidate has a general understanding of the core topics within risk in addition to awareness of key regulatory events within the industry.
  • Just like any other qualification though, it is not the sole indicator of your ability to do well in the job so it won’t be your golden ticket to your dream job within risk.

Having looked at LinkedIn, eFinancialCareers and other job sites, the impression that I get is that jobs which have the FRM qualification seem to be concentrated within Market Risk. Quoting Schweser: Certified FRMs are most likely to be risk analysts, risk managers, credit risk analysts, market risk analysts, regulatory risk analysts, operational risk managers, or risk chief officers. With the exception of risk chief officers (yes, I need to improve my network) this statement is fairly accurate. Conclusion If you are working within risk and you are looking to cement your knowledge of the subject and looking to add to your CV, I would strongly recommend taking the exam. Compared to the CFA exam I believe that the effort/reward ratio for this exam is higher and I have started seeing more job postings that list FRM as a good to have under candidate requirements. Some Material that I found useful regarding the EXAMhttps://crushthefinancialanalystexam.com/frm-exam-dates/ A good overview of key exam dates for 2020. https://www.frmquestionbank.com/garp-frm-pass-rate/ This article outlines some of the reasons why FRM pass rates are low so it’s definitely worthwhile reading to avoid making some of the most common mistakes that candidates make. I personally think: 4 Waiting too long to start studying, 10. Not using enough practice tests and 11. Passing easy practice tests leading to over-confidence are the most common pitfalls.

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