What FRM Part 1 Foundations of Risk Management actually tests
Foundations is 20% of the Part 1 exam:
| Area | What it covers |
|---|---|
| Risk Management Process | Identify, measure, manage, monitor |
| Types of Risk | Market, credit, liquidity, operational, legal/regulatory |
| Corporate Risk Governance | Risk appetite, risk culture, board oversight, CRO role |
| Enterprise Risk Management | ERM framework, risk aggregation, diversification benefits and limits |
| Financial Disaster Case Studies | LTCM, Barings, Metallgesellschaft, Orange County, Amaranth, Bear Stearns, Lehman |
| Risk-Adjusted Performance | RAROC, Sharpe ratio, Treynor ratio, Jensen's alpha, information ratio, Sortino ratio |
| CAPM & APT | Systematic vs. idiosyncratic risk, factor models, Fama-French three-factor model |
| GARP Code of Conduct | Professional integrity, conflicts of interest, confidentiality |
Why the case studies aren't just history trivia
FRM questions on LTCM, Barings, or Lehman don't ask "what year did this happen" — they ask you to identify the root cause (e.g., over-leverage, a rogue trader exceeding limits, liquidity mismatch) and connect it to a governance or risk-management principle covered elsewhere in Foundations. Treating these as stories to memorize, rather than case studies to analyze, is the most common way candidates lose marks here.
Sample question: Sharpe Ratio
Foundations of Risk Management · Medium difficulty
A portfolio has an expected return of 12%, a risk-free rate of 3%, and a standard deviation of 15%. What is the portfolio's Sharpe ratio?
A. 0.45
B. 0.60
C. 0.80
D. 1.20
The correct answer is B — 0.60.
Sharpe ratio = (Rp − Rf) / σp = (12% − 3%) / 15% = 9 / 15 = 0.60. It measures excess return per unit of total risk (standard deviation) — contrast with the Treynor ratio, which divides by beta (systematic risk only) instead.
Sharpe ratio = (Rp − Rf) / σp = (12% − 3%) / 15% = 9 / 15 = 0.60. It measures excess return per unit of total risk (standard deviation) — contrast with the Treynor ratio, which divides by beta (systematic risk only) instead.