Investment Management
The last of the five risk-related disciplines on the 2008 FRM exam deals with Risk Management and Investment Management. This material will account for 10% of the questions on the exam (14 of the 140 questions) and is divided into two sections:
Traditional Investment Management
Hedge Fund Management
Traditional Investment Management
This section highlights the basics of portfolio theory and discusses measures used to evaluate portfolio performance. Modern portfolio theory is based on the idea of portfolio diversification, the efficient frontier, and the capital asset pricing model. Performance measures such as Sharpe, Treynor, and Jensen, can be used to compare portfolios. You will see these measures appear in multiple places, so be sure to memorize them for the exam. New to this year's curriculum is the concept of performance attribution. You will learn how a return can be broken down into several components. This section then discusses value at risk (VAR), but unlike Book 2, we examine the calculation of portfolio VAR. Finally, the concept of risk budgeting is introduced. Here you will discover how optimal portfolio allocation can be achieved.
Hedge Fund Management
There are nine readings in the FRM curriculum that deal with hedge funds. Individual hedge fund strategies (e.g., long/short strategies) are discussed as well as the emergence of hedge funds relative to mutual funds. Other key topic areas deal with funds of hedge funds, benchmarking, and style drift. New to this year's curriculum is an interesting article on hedge fund performance replication. Fund replication is difficult due to the lack of transparency in the hedge fund industry.
If you are familiar with the CAIA curriculum, you may notice some overlap between this risk-related discipline and both levels of the CAIA exam (which focuses on alternative investments such as hedge funds). The CFA curriculum does briefly examine performance analysis and hedge funds as well, but the breadth of the hedge fund material is much greater in the FRM curriculum.
As a final thought, I'm pleased to announce that our FRM study materials are now shipping! We will support our FRM products throughout the study season by providing Kaplan Schweser students with Instructor-led Office Hours and the exam-tips blog, both of which launch in September. Also, those candidates who have registered for the weekly online class will be able to directly interact with our FRM instructor. I will continue to post valuable information to the FRM public blog as well as respond to any candidate questions. The questions and comments that I've received thus far have been fantastic, so I encourage you to keep sending them! Dr. Greg Filbeck and I are more than happy to assist you during your FRM studies.