Questions regarding - Foundations of Risk Global Topic Review Question Set

[chatty06]

Hi All,

I took the Foundations of Risk Global Topic Review Question Set today after reading the Schweser book 1 Foundations of Risk Management and completing all sections within the part 1 study planner in Bionic Turtle.

Is it me or were a number of these questions not taught in the 2017 curriculum? If this is true can someone please tell me which questions are actually related to the 2017 part 1 Foundations of Risk Management?

For example questions 603, I don't remember seeing anything on how to calc VaR or expected shortfall.

In question 604 I don't remember seeing anything on how to calculate default probability.

I read in another post that these questions are still showing questions from previous years curriculum, which is extremely frustrating since I am basing my progress on these quizzes and I'm getting the answers wrong because I haven't read the material.

I understand that in the grand scheme of FRM that learning these concepts is important but this is a difficult test with lots of material so I would like to focus on what will be tested primarily and then revisit the non-testing information later.

Can someone tell me which questions in this question set are related and have been taught in the 2017 materials? I would like to focus on that. I continue to get side tracked by old material and it's getting very frustrating!

 

[David Harper CFA FRM]

@chatty06 you didn't follow up and tell me where your "2nd version" of Jensen's alpha is, can you please do that since I spent time trying to find it https://forum.bionicturtle.com/threads/jensens-alpha-formula-please-confirm.10512/

VaR, ES and default probability are clearly all in Part 1 FRM, do you not have the syllabus? (if not please see https://forum.bionicturtle.com/resources/categories/frm-planning-garp.2/) Questions numbers 6xx.x refers to question written in 2016, so they are definitely valid (the P1 is somewhat settled). They appear because I often try to write questions that try to stretch by applying (cross-fertilizing) a T3 or T4 topic; e.g., if the topic is T2 binomial, I am likely to introduce bond default pattern (yes, technically prematurely). My best questions try to apply something realistic (e.g., a produce or market in T3 or T4) in the context of a basic idea (T1 or T2). That's a feature, not a bug, as far as I am concerned. My questions aren't necessarily so linear: to do that, there would be a smaller, simpler set.

We don't have time to itemize questions per your response, sorry. It's not as if GARP's exam is so tightly correspondent to the current (versus last or 2 or 3 prior years) LO that such 1:1 itemization would even actually be helpful. For Part 1, the durable concepts haven't changed in years, so it's not like itemizing 2014 or 2015 versus 2017 has any big payoff, as much of their P1 churn is not highly consequential to testable concepts. Thanks,

cc: @Nicole Seaman

 

[chatty06]

@chatty06 you didn't follow up and tell me where your "2nd version" of Jensen's alpha is, can you please do that since I spent time trying to find it https://forum.bionicturtle.com/threads/jensens-alpha-formula-please-confirm.10512/

VaR, ES and default probability are clearly all in Part 1 FRM, do you not have the syllabus? (if not please see https://forum.bionicturtle.com/resources/categories/frm-planning-garp.2/) Questions numbers 6xx.x refers to question written in 2016, so they are definitely valid (the P1 is somewhat settled). They appear because I often try to write questions that try to stretch by applying (cross-fertilizing) a T3 or T4 topic; e.g., if the topic is T2 binomial, I am likely to introduce bond default pattern (yes, technically prematurely). My best questions try to apply something realistic (e.g., a produce or market in T3 or T4) in the context of a basic idea (T1 or T2). That's a feature, not a bug, as far as I am concerned. My questions aren't necessarily so linear: to do that, there would be a smaller, simpler set.

We don't have time to itemize questions per your response, sorry. It's not as if GARP's exam is so tightly correspondent to the current (versus last or 2 or 3 prior years) LO that such 1:1 itemization would even actually be helpful. For Part 1, the durable concepts haven't changed in years, so it's not like itemizing 2014 or 2015 versus 2017 has any big payoff, as much of their P1 churn is not highly consequential to testable concepts. Thanks,

cc: @Nicole Seaman

Hi David,

Thanks for the quick response. Maybe I'm approaching this the wrong way. When you say " VaR, ES and default probability are clearly all in Part 1 FRM" I don't doubt this. What I am saying is that since I'm only at the very beginning of part 1 and I've only completed book 1 Foundations of Risk Management I have not been exposed to these to the level that is required to answer these questions.

Yes, VaR has been explained conceptually but no where in the GARP book 1 Foundations of Risk Management or in your Foundations of Risk Management study planner do I see the formulas for these three items or sample problems relating to these.

The very first item in the study planner is an excel worksheet on "Intro Var." I can revisit this but when I started I didn't spend much time with this since there really wasn't any context yet in what it was in regards to (too early in the study planner?). In regards to ES and default probability I see no mention of this in the Foundations of Risk Management study planner or GARP book 1 Foundations of Risk Management.

I understand that these will likely come later in FRM part 1 curriculum. The thing I struggle with is that I use the quiz as a way to determine if I'm ready to move on to the next set of materials. When I come by a number of questions that I can't answer because I wasn't exposed to the needed information required to answer these questions I am not able to get comfortable with moving forward.

Yes, I can read the solutions to the questions but my question is whether I have missed the bulk of the needed information on the subject and the next variation of VaR, ES or Default probability questions I come by I will get it wrong.

For these items that do not appear to be included in the part 1 book 1 Foundations of Risk Management do you just recommend learning how to do the problem by reviewing the given solutions, in anticipation that it will be more thoroughly discussed in the future materials or would you recommend disregarding these and focusing specifically on material for Foundations of Risk Management, then moving on to the next section where there will be more context on the questions that seem to be missing the necessary information to answer these questions?

I'm sure this can be frustrating from your perspective as well since the materials and sequence of those materials are changing year to year. I know this is a very difficult test and I want to make sure I am going at it in the most efficient way possible.

Thanks

 

[David Harper CFA FRM]

Hi @chatty06 That is thoughtful, thank you!

I think we first need to acknowledge the endearingly dynamic personality of the FRM; I would go so far as to say that FRM P2 is a bit chaotic and P1 is finally settling down to become only slightly chaotic. Chaos is a somewhat undesirable feature (mitigated by its flipside advantage of dynamism: risk is dynamic) caused by the rapid churn of an anthology of (diverse) authors. Can I give just two examples, plucking "default probability" from your list (although I can do this for ES and I can do it for pages with VaR)? I am reviewing GARP's own 2017 P2 practice paper. It's P2 so that is more chaotic than P1, please keep in mind that caveat. The P2 paper has a fine question about KMV's default probability method, except for it was true years ago but incorrect today (nevermind that technically, the referenced reading was dropped such that one aspect of the solution has no current reference in any reading to my knowledge; i.e., KMV default threshold vs Merton); in this instance, GARP itself is playing on a moving field. Second example, there is a question that gives/asks for "marginal default probabilities." In previously assigned Saunders (Ch 10), this term was/is a synonym for "conditional default probability" (and I suspect, this is true for many of us still). But that reading was dropped, and Malz is the new reference and he actually defines marginal default probability as the first derivative of cumulative default probability (which we don't use). This is merely one set of examples for one concept, I can write two dozen more examples like this off the top of my head. I can do this for P1, too: if I dial up accuracy and coherence (e.g., terminology consistency) as criteria, I can show you dozens of superficial conflicts in the FRM. I just want to concretely illustrate the reality of a syllabus that both churns and binds together authors who are not themselves coordinating with the intention (this is not how the CFA works, you will notice. The CFA is miles ahead on methodological coherence). I do not mean it to be entirely pejorative, rather I view this approach as somewhat realistic, and with some benefits (e.g., dynamism, recency).

Okay against that context, I spend a lot of my life writing FRM questions and, while I'm not sure I've ever articulated this (even to myself), I think my intention is informed roughly by these principles, and I have ordered them in importance:

1. Depth (or granularity) is my first intention
2. Difficult is my second priority
3. Recency (or "being current") is reflected in my always writing new questions
4. Coherence is last, truth be told, and not something I currently prioritize highly because I am keenly aware of the underlying reality of the FRM exam. Why should it be, if each year they can drop a reading and replace it with an author who defines terms differently? For example, the new-to-2017 De Laurentis text is sincerely one of the worst and least useful books I've ever read and is itself riddled with errors [I've submitted several errors to the publisher] exacerbated by formulas--sometimes incorrect--without illustrations, for example, so how do you achieve coherence in such a context?

So I would like to think this prioritization is also a somewhat honest assessment of our strengths and weaknesses. Depth (or granularity) refers to the fact that, for many of these questions, I'm not thinking about what's in the notes or the "scaffolding," (the instructionl setup) I'm just try to get to the bottom of the LO concept vis à vis the author (and in many cases peripheral authors), and if i can, i think of it as a bonus if i can cross-fertilize another Topic's concept (e.g., employ bonds or VaR prematurely in T1 or T2). This principle is also displayed in our use of spreadsheets whenever possible. And, I admit that, because we are trying to help our customer "beyond the exam," I think of depth as trying to understand the concept and stress test it, beyond the level of the exam. This forum itself has been the source for many, many errata items provided to published authors of the assigned readings; many of the revisions in subsequent published editions of FRM readings came from here. Difficulty is actually calibration: trying to revise the question into a format that is "one or two notches" more difficult (and time consuming) than you would see on the exam. (In fact, if you look at this last May exam feedback, which I have not yet fully processed, I am always surprised to read when people write that the exam was pretty close in difficulty to BT questions: I am always shooter for a little MORE difficulty, so that our customers don't feel under-prepared). Okay, so given those first two, I think we can already see why the PQs don't necessarily satisfy somebody who wants them to be "sequentially packaged and streamlined" so to speak. Recency (3rd priority) is somewhat to keep up with the syllabus, but honestly that would not personally motive me sufficiently. Part 1 recency is way overrated: Gujarati was the econometrics author before Miller and before discontinued S&W Chapter 2 & 3, but to my thinking, those old questions [Gujarati] are still the best for those introductory stat ideas (?!). It is totally understandable that new candidates (with no FRM history) want all of the materials to be updated, but the relevance of recency varies widely by section and it not always what it seems. In some areas, recency barely matters. In some other new areas, it will be years, if ever, that a qualified question will be asked. In other words, there are current readings that GARP is not probably ready yet to ask questions about, to be blunt about it. The importance of recency is highly variable in the FRM. But one drawback of striving for recency, ironically, is that, at any given point in time, some/many sections are served by apparently older questions only.

So given those first three, I do think coherence suffers (to your point, I think). For example, if we wanted to make coherence the highest priority, here is what i would do: first, I would stop writing new questions. Then I would reduce the number of questions to an intellectual domain of 50% or 60% of the current concepts, just the critical concepts. In other words, I would just boil down the sections to their most repeatable and reusable components. I'd take some of the questions "out of the weeds" and maybe archive them. In short, I'd prioritize a smaller, simpler, more robust-over-time (reusable) set of questions. This approach, I think, would be much more satisfactory to your style. And, if our goal were only to help people pass, full stop, there would be more of an argument for that. We have a competitor who I do respect who basically takes this approach (PM me and I'm glad tell you who I am thinking about, I make referrals to them often). I have e-learning pedagogical training (so i know what that looks like), and I admit our PQs aren't consistent setup with comprehensive scaffolding (i.e., where the lesson prepares the student to answer the questions without further resource). Sometimes I think a better business person would do that. But, aside from its own drawbacks vis à vis the exam, that approach just wouldn't inspire me. I'd much rather go for depth and learn so masterfully that we become thought leaders and (eg) a repository for identifying GARP's own mistakes (which we are!). I'm grateful we have some customers who, for example, open up the underyling spreadsheet and actually want to understand the calculation of a portfolio beta, rather than just memorize the phrase without having any clue what it actually means. If i had to do this for exam memorizers, I would have quit six years ago. But i do think we are always trying to catch up on the coherence, truth be told.

Given that, I think my summary view about hope for many of PQ questions is that they are less "mastery milestones" and they are more like part of the learning path; as in, the reading or note introduces the stuff, and then you get your hands dirty with some questions. Something like that. I didn't mean to give such a long answer, I hope it's okay, I think you raise an important consideration for us to be mindful about. I do think your point elevates the importance of effective (global) topic summaries and online quizzes. @Nicole Seaman do you have anything to add? Thank you!

 

[chatty06]

Thanks David,

Your explanation definitely helps me understand the approach you are using. It does help put my mind at ease that I didn't miss something and that these questions are not included in error.

Based on this I believe it makes sense for me to go through each book/study planner for part 1 and fully understand the concepts that are being taught. Go through and understand how the questions should be answered but not let wrong answers hold me back from moving on as long as I am able to understand the solution after review. Basically using the questions as more of a tool for learning than a measure of progress (at least in the first pass).

It sounds like after making a first pass through all of part 1 materials it will come together and the questions will start being more relevant from a part 1 perspective. Then taking the questions and mock exams will give me a good measure for progress where I can go back and dive deeper into areas that I may struggle with.

Thanks for spending the time to explain this. Hopefully it will help others that struggle with the same issues I did.