FAQ Before Exam BT Study Notes vs. GARP materials

[Eustice_Langham]

David, I have a question more for my syllabus understanding than really anything else. In your "Chapter 5. Modern Portfolio Theory (MPT) and the Capital Asset Pricing Model (CAPM)" sample notes, under the heading "Key Ideas in MPT and CAPM", you discuss For the exam be prepared to solve for the expected return and variance of a two asset portfolio..my question is as follows. I checked both the GARP material and Kaplan material and the LO and I cant see these same formula's that you outline as being important or even mentioned in these notes.

Furthermore, your sample notes on this topic discuss MPV and global MVP, again not mentioned in either GARP or Kaplan.

I am interested in understanding why there is this discrepancy between your notes and the GARP and Kaplan?

Thankyou

 

[Nicole Seaman]

David, I have a question more for my syllabus understanding than really anything else. In your "Chapter 5. Modern Portfolio Theory (MPT) and the Capital Asset Pricing Model (CAPM)" sample notes, under the heading "Key Ideas in MPT and CAPM", you discuss For the exam be prepared to solve for the expected return and variance of a two asset portfolio..my question is as follows. I checked both the GARP material and Kaplan material and the LO and I cant see these same formula's that you outline as being important or even mentioned in these notes.

Furthermore, your sample notes on this topic discuss MPV and global MVP, again not mentioned in either GARP or Kaplan.

I am interested in understanding why there is this discrepancy between your notes and the GARP and Kaplan?

Thankyou

Hello @Eustice_Langham

I will let David explain the specific concepts and formulas that you are referring to in Chapter 5, however, I wanted to provide this overview of why you will find some concepts in our materials and not in the GARP materials.

The key ideas that David has listed on the first two pages of this set of notes are from years of gathering information on the concepts that have been on the exam. David has been writing FRM content for well over a decade so we want to make sure that our members are prepared for the concepts that will be tested on the exam. Previous to 2020, there were source authors assigned in the curriculum. This year, GARP created their own materials. We are using both GARP materials (very little, however, because we have found MANY errors), the previous source authors (in the case of FRM-5, the authors were Elton and Amenc), and David's many years of experience with these topics. You may find our curriculum analysis XLS helpful, as it shows all of the authors that were used in previous years.

So, yes, there may be content that you will not see in the GARP materials. We cannot speak for the content that is in the Kaplan materials, as we are not affiliated with them. Our materials go above and beyond some of the concepts so you are learning them in-depth and not just memorizing them for the exam. Any extra information that we provide will also help you to better understand the concepts that will be tested. I hope this is helpful.

 

[David Harper CFA FRM]

Hi @Eustice_Langham I think @Nicole Seaman already did a good job answering you, but I will add a bit. In the specific, a P1 (or P2 for that matter) FRM candidate definitely needs to know how to solve a two-asset portfolio expected return and variance. This is highly testable. Previous exams, for example, have asked for a 2-asset 9X% normal VaR which requires multiplying the 2-asset portfolio standard deviation by 1.645 (the normal deviate at 95% confidence). It is for me a no-brainer to say this should be in an FRM candidate's toolbox. Chapter 5 is called MPT and CAPM; previously assigned (i.e., 2019) was Elton Gruber for MPT and, like all authors on the topic, there is a central role for σ(P) = w1^2*σ(1)^2 + w2^2*σ(2)^2 + ρ(1,2)*w1*w2*σ(1)*σ(2), In a way, its vector form encapsulates the essence MPT which is that diversification (aka, imperfect correlation) affords the possibility of efficient portfolios.

I can't speak to Kaplan's materials, I don't have them (but I am a fan of the company and the people ). In regard to GARP's new P1 2020 materials, see https://forum.bionicturtle.com/threads/problems-in-garps-2020-frm-material.23011/ ... I haven't had time to add to this thread, but there are dozens more issues that I have identified, and need to add. The lack of 2-asset portfolio variance is a straight-up omission in GARP's material, so I will add this to the issues/errata. Why does this happen? It does not give me any pleasure to say, but this is GARP's first year writing their own material. Because the FRM was always a curation of external writings, they don't seem to have developed deep in-house expertise due to the content outsourcing (they have relied heavily on EPPs like us and others to give them considerable corrections feedback; e.g., https://forum.bionicturtle.com/thre...-committee-and-garps-board-of-trustees.22758/). If you read my problems thread, you'll see that the 2020 material makes some very basic mistakes; e.g., ES is inadequately defined, HS VaR is inadequately defined, these are both measures with a decade of history, which was very disappointing to me, considering these are well-established definitions.

So the 2-asset variance is a softball question: it should be in anybody's study notes, most obviously; it is the basis for simplest application of parametric (analytical) portfolio VaR. However, Nicole is also correct that we are always trying to go a bit deeper. So there is another category of concepts that don't meet this "obvious" test, where we've included details not in GARP's material, by virtue of going deeper. Changing subject again, as I've written many times, to me the more salient weakness of Chapter 5 (that typifies many of the new chapters) is simply the paucity of illustrated examples: the RAPMs metrics (eg Sharpe, ...) are not illustrated with any examples. Illustrated examples are essential to learning quantitative concepts. Most of us need to see the information ratio calculated, if for no other reason than to discover there are several ways to do it. We can only control our work (and attempt to otherwise positively influence the FRM). I hope that's helpful,

 

[Eustice_Langham]

Thankyou both for your responses, both very helpful. It's interesting to understand how you see the extrapolation of learning should occur.This topic I actually find it quite interesting and I thought that I had a good grasp on it, that was until I saw your notes, so your explanation is welcome. I am also interested to your comments on the other EPP, I find Kaplan notes pretty good, GARP notes are good in some parts, but other parts I feel are too detailed and they dont seem to follow precisely the LO. Kaplan's sections are of course structured around the LO so in this regard its very useful to have this structure. Another EPP is Analyst Prep, not sure if you have seen his work but I find his style of lecturing on the material good as well. Thanks again for your prompt response.