Foundations of Risk Management: FRM® Part I
It is 20% of the 2026 Part I exam. 52 learning outcomes across 11 learning modules.
The Building Blocks of Risk Management
- Define risk and set risk management against risk taking, showing how the two differ.
- Apply, weigh and contrast the ways risk is gauged and handled, namely enterprise risk management, qualitative risk assessment techniques and quantitative measures.
- Tell expected loss and unexpected loss apart, illustrating both with examples.
- Read the link between risk and reward, and show how risk management can be distorted when interests conflict.
- Describe the main classes of risk and set them apart, showing how each arises and judging what effect each could have on an organization.
- Show how different risk factors can act on one another, and outline why combining risk exposures into a total is hard.
How Do Firms Manage Financial Risk?
- Contrast the strategies open to a firm for managing its risk exposures and identify the circumstances in which each would be chosen.
- Describe how a firm's risk appetite relates to the risk management decisions it makes.
- Weigh the pros and cons of hedging risk exposures and explain the difficulties that can come up when a hedging strategy is put into practice.
- Select and use hedging methods that suit operational and financial risks, with pricing, foreign currency and interest rate risk as the cases in point.
- Gauge how far risk limits, derivatives and other risk management instruments change a firm's risk position.
The Governance of Risk Management
- Account for the shifts in regulation and in corporate risk governance that the 2007-2009 financial crisis brought about.
- Outline best practices in governing the risk management processes of a firm.
- Explain what a firm's board of directors is responsible for, and what part it plays, in risk management.
- Assess how a firm's risk appetite is linked to its business strategy, including what incentives contribute.
- Show, with illustrations, how a firm's functional units depend on one another in managing risk.
- Assess the part played by a firm's audit committee and the responsibilities it carries.
Credit Risk Transfer Mechanisms
- Contrast the types of credit derivatives, describing what they are used for and what benefits they offer.
- Explain the conventional mechanisms by which a company can limit its exposure to credit risk.
- Assess what part credit derivatives played in the 2007-2009 financial crisis and describe how the credit derivative market changed afterwards.
- Explain the securitization process and the role of a special purpose vehicle (SPV), then judge how risky the various bank business models for securitized products are.
Modern Portfolio Theory (MPT) and the Capital Asset Pricing Model (CAPM)
- Set out the ideas of Modern Portfolio Theory and read the efficient frontier of Markowitz.
- Interpret how the CAPM is derived and what its components are.
- Outline the assumptions on which the CAPM rests.
- Contrast the security market line with the capital market line, interpreting each.
- Calculate what an asset is expected to return by applying the CAPM.
- Explain what beta means and derive its value for one asset or for a whole portfolio.
- Evaluate performance with the Sortino ratio, information ratio, tracking error, and the Jensen, Treynor and Sharpe performance indices, computing each, comparing them and interpreting the results.
The Arbitrage Pricing Theory and Multifactor Models of Risk and Return
- Set the CAPM beside the Arbitrage Pricing Theory (APT), explaining the APT along with the assumptions it makes.
- Describe what goes into a multifactor model, factor betas included, and explain why using such models for hedging is difficult.
- Estimate the return an asset is expected to earn under a multifactor model as well as under a single-factor model.
- Describe how a portfolio can be built so as to hedge exposure to several factors.
- Apply the three-factor model of Fama and French to estimate asset returns, and describe how it is set up.
Principles for Effective Data Aggregation and Risk Reporting
- Outline the advantages a firm gains when its aggregation of risk data and its reporting are effective.
- Explain why it is hard to put a robust process for aggregating and reporting risk data in place, and what consequences follow if the data used are of poor quality.
- Summarize the central principles of governance covering both risk data aggregation and risk reporting.
- Summarize the features of sound data architecture and IT infrastructure, along with good practice in risk reporting.
Enterprise Risk Management and Future Trends
- Explain what Enterprise Risk Management (ERM) is and how an ERM program differs from the silo-based approach to risk management traditionally followed.
- Outline why a firm would be motivated to adopt an ERM initiative.
- Explain best practices for governing an ERM program and putting it into effect.
- Describe risk culture, set out what marks a strong corporate risk culture, and outline the obstacles a firm meets in building one.
- Explain what scenario analysis contributes when an ERM program is implemented, along with its strengths and weaknesses.
- Explain why stress testing programs and capital planning make use of scenario analysis.
Learning from Financial Disasters
Anatomy of the Great Financial Crisis of 2007-2009
- Describe the historical background to the 2007-2009 financial crisis and summarize its major events.
- Describe how the crisis built up and which factors were important in that build-up.
- Describe how collateralized debt obligations (CDOs) and subprime mortgages helped bring the crisis about.
- Compare how rating agencies, mortgage brokers and lenders, financial intermediaries and banks each figured in the crisis.
- Explain how shifts in short-term wholesale funding markets fed the crisis, systemic risk effects included.
- Summarize how central banks reacted to the crisis.
GARP Code of Conduct
- Outline the duty every GARP Member carries on conflicts of interest, ethical conduct, professional integrity, information confidentiality, and following generally accepted risk management practice.
- Describe the possible consequences of breaching the GARP Code of Conduct.
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