How to grasp all CAPM related contents in foundation part?

[FRMStrawberry]

Hi David,

I am studying the Chap 5---non standard forms of capital asset pricing models in the manual.
I feel like it is so hard to understand it. When I went through these contents in your notes, I couldn't memorize all the details.

could you please give me any tips on how to study and grasp the contents on CAPM part?
Also I am not very comfortable to skip this part if I am stuck there. I know this is a not a good strategy. Could you please tell me how important this part in FRM part I exam? How much time I am supposed to spend on this?

Thanks.

 

[David Harper CFA FRM]

Hi FRMStrawberry,

I am doing those videos now, and I think i know what you mean. I'd like to speak freely so I need to insert the usual caveat: like any FRM providers, I have a history with the exam and am extremely grateful that GARP welcomes improvement feedback (i.e., I will be linking to this thread in my feedback), but beyond that, please don't expect my opinions to be reliable and GARP certainly doesn't render a predictable test. I need to emphasize that, in reality, I CANNOT ANSWER this question with any reliability: "Could you please tell me how important this part in FRM part I exam?" It's possible GARP doesn't know today, depending on where they are in the question development process. With that said ...

I think a big weakness in the 2012 P1 AIMs is the over-assignment (over-weighting) of CAPM; CAPM also re-appears in P2, reading 59, which feels like inertia. In P2, instead of re-visit CAPM, P2 should enter the real world with "beyond CAPM" issues/approaches.

My guess is that much of the CAPM and non-standard detail won't be tested; I won't be shocked if almost none of it is. Some of the theory is beyond average ~ 3 minute quizzing. Pragmatically, I actually think you could skip much of it and be no worse off exam-wise. APT is the same: for years we've been assigned some difficult APT, but to my knowledge, none of the theory has been tested (just the linear combination for a return, which requires none of the theory).

In the upcoming video, I will try to hover on the essentials, which for practical purposes I believe is not a long list:

• The capm formula for an expected excess return; applying it to find alpha, and discount cash flows. Definitely be numerically fluent with regression-type CAPM problems; e.g., solve for expected excess return; find beta.
• Understand the construction of the capital market line (i.e., MVPs --> efficient frontier with market portfolio --> add Rf Rate to get CML; what is CML?)
• Understand the SML (expected excess return conditional on beta). My guess is that comprehension of CAPM, CML & SML gives ~80% or 90% coverage in practical (exam terms)
• I would bite the bullet and memorize the (laughably) restrictive assumptions of CAPM: IMO, much can be learned by simply pondering these (e.g., what do we mean by mean-variance, homogenous expectations)
• As for the rest, I would not let it sink too much time (low testability, low future concept payoff). For exam purposes, I would be okay to skip where stuck on theoretical underpinnings.

I hope that helps, thank

 

[FRMStrawberry]

David,

Thanks a lot for the detailed information. I think I will skip the contents if I feel that I was stuck there too long. Also I only bought your Tier I product, that means I won't be able to watch ur video. Right?

How can I watch your video if I want to add this product? Thanks a lot.

 

[David Harper CFA FRM]

Thanks FRM Strawberrry! Yes, Tier 1 = notes + PQ but excludes videos; Tier 2 adds videos. I pinged Suzanne this thread so she can tell you what to do, if you want to upgrade. Thanks!

 

[FRMStrawberry]

Thanks for the helps. I have got any feedback from Suzanne yet. Do you mind sending me her working email address? I can email to her.

Regards.

 

[David Harper CFA FRM]

Sorry FRMStraberry, I must have miffed the task assignment. She is at [email protected], but i just pinged directly, so she will definitely reply at next convenience.
@Suzanne: do we have how-to upgrade in FAQ? if not, can we add? Thanks,

 

[Suzanne Evans]

Sorry FRMStraberry, I must have miffed the task assignment. She is at [email protected], but i just pinged directly, so she will definitely reply at next convenience.
@Suzanne: do we have how-to upgrade in FAQ? if not, can we add? Thanks,

Hi FRMStrawberry & David,

I've added an FAQ for the upgrade here.

To upgrade from Part 1 or Part 2 Tier 1 to Tier 2 would be $100
To upgrade from Part 1 + Part 2 Tier 1 to Tier 2 would be $200

Thanks,
Suzanne

 

[FRMStrawberry]

Hi FRMStrawberry & David,

I've added an FAQ for the upgrade here.

To upgrade from Part 1 or Part 2 Tier 1 to Tier 2 would be $100
To upgrade from Part 1 + Part 2 Tier 1 to Tier 2 would be $200

Thanks,
Suzanne

Hi Suzanne,

Thanks a lot for the response. I have sent your email this morning and ask you to help me upgrade to be Tier 2 for Part 1 of FRM.

Could you please let me know how it goes?

Thanks a lot.

 

[Suzanne Evans]

Hi Suzanne,

Thanks a lot for the response. I have sent your email this morning and ask you to help me upgrade to be Tier 2 for Part 1 of FRM.

Could you please let me know how it goes?

Thanks a lot.

Your account has now been upgraded and I have confirmed your access to the videos as well.

Thanks,
Suzanne

 

[spidercat]

Hi FRMStrawberry,

I remember the CAPM assumptions as follows:

"Three drunk laughing parrots punched monkeys mate shark (into the) high heavens"

Three - No Transaction costs

Drunk - Assets infinitely divisible

Laughing - Unlimited lending and borrowing

Parrots - No personal tax

Punched - Perfect competition (price-takers)

Monkeys - Mean-variance

Mate - All assets are marketable

Shark - Short selling allowed

...into the...

High - Homogeneity: single period

Heavens - Homogeneity: identical expectations

- Hope this helps.

 

[David Harper CFA FRM]

Spidercat - thanks, that is pretty awesome, I am going to use it!

 

[FRMStrawberry]

spidercat,

Thanks a lot for your kind tips. I am going to use it too.
By the way, how do you feel the exam? Do you feel you are ready for the exam yet?

I went through the handbook once already, but feel like that I haven't prepared it very well.
Good luck to both of us.