Excel
02 Dec 2008
Dec
12
CFA versus FRM, Part 2: Comparing Exams
by David Harper, CFA, FRM, CIPM
Yesterday, I compared job markets served by the CFA and the FRM. Here, I will compare the actual exam contents of the CFA and the FRM. I listed out the major topics and slotted them into the Venn diagram below. Bold indicates an exclusive emphasis (e.g., the CFA has deep content on financial statement analysis, the FRM has none. On the other hand, the FRM has deep coverage of Basel II, while the CFA doesn't mention it). A regular (not bold) is not an exclusive emphasis. For example, asset allocation is covered by the CFA; it is referenced in the FRM, but not really with a robust set of learning outcomes. Similarly, the FRM covers credit risk models with, collectively, quite a few learning outcomes; the CFA does refer to credit portfolio models, but not in much depth.
In the middle is the overlap, those topics where I find the exams to have much in common: basic statistics, volatility & correlation, fixed income, introduction to corporate finance (formalized in the CFA and referenced in piecemeal in the FRM), intro to derivatives, intro to credit risk, credit derivatives, intro to hedge funds, factor models and risk/return metrics (e.g., Sharpe, information ratio).
The above is a high-level topical comparison. But note another key difference. A difference that is important to, say, a CFA candidate studying for the FRM: the FRM is all about the risk perspective and the application of risk tools. An example might help:
- The CFA itemizes basic credit derivatives like a credit default swap (CDS) or a total rate of return (TROR). Here, to generalize, the emphasis would be on understanding the mechanics of a CDS
- In the FRM, the study of a CDS, I like to say, should happen in two passes: first, to get the mechanics. Second, to analyze the risk transfer (which risks are transferred and which are not? and how does this compare to other financial arrangements that could be used instead).
That is just to say the obvious: that the CFA is about academic mastery (and then some) while the FRM tries very hard to be about the practice of risk measurement and management. For each of the shared topics, this gives rise to a different "angle of approach."
Chartered Financial Analyst (CFA)
The CFA is three exams (Levels I, II, and III). Collectively, it is much broader than the FRM. Here is the topical arrangement:
| Topic Area | Level I (%) | Level II (%) | Level III (%) |
| Ethics | 15 | 10 | 10 |
| Quantitative Methods | 12 | 5-10 | 0 |
| Economics | 10 | 5-10 | 0 |
| Financial Reporting & Analysis | 20 | 15-25 | 0 |
| Corporate Finance | 8 | 5-15 | 0 |
| Investment Tools (total) | 50 | 30-60 | 0 |
| Equity Investments | 10 | 20-30 | 5-15 |
| Fixed Income | 12 | 5-15 | 10-20 |
| Derivatives | 5 | 5-15 | 5-15 |
| Alternative Investments | 3 | 5-15 | 5-15 |
| Asset Classes (total) | 30 | 35-75 | 35-45 |
| Portfolio Management & Wealth Planning (total) | 5 | 5-15 | 45-55 |
| Total | 100 | 100 | 100 |
Financial Risk Manager (FRM)
The FRM is only one exam, but in my estimation, it is about 150% to 175% more difficult than either the Level I or Level II CFA. It goes deeper into quantitative methods and some of the exam questions can be surprisingly hard. Here is the topical arrangement (based really on 2007, but should hold up pretty well for 2008):
| Topic Area | Weight |
| Quantitative Analysis | 10% |
| Probability | |
| Volatility & Correlation | |
| Extreme value theory (EVT) | |
| Linear regression | |
| Market Risk Measurement & Management | 25% |
| Fixed income | |
| Derivatives (futures, options, swaps) | |
| Value at risk (VaR) | |
| Market risk | |
| Cash flow at risk (CFaR or CaR) | |
| Credit Risk Measurement & Management | 30% |
| Counterparty risk & Securitization | |
| Credit risk (ratings, LGD, credit portfolio models) | |
| Economic capital | |
| Loan portfolio | |
| Credit derivatives (e.g., CDS, CLN, TROR, CDO) | |
| Operational and Enterprise Risk, Legal & Ethics | 25% |
| Operational risk | |
| Model risk | |
| Case studies (e.g., Amaranth, LTCM) | |
| Other TBD (2008) | |
| Basel II Accord | significant |
| Investment Management Risk | 10% |
| Factor models (multi-factor, CAPM) | |
| Hedge fund strategies & styles (& HFoF) | |
| Portfolio VaR | |
| Other TBD (2008) |
Comments
Thanks David for the best posts I found comparing CFA and FRM. I am an IT professional working in finance industry, in a Rating agency. To deepen my domain skills and to get a better job (preferably in front office) I am considering taking one of these certifications. Which one will be better for me? My goal is to become a hybrid IT-Finance professional. One typical role is a Project Manager who does high visibility projects for the company.
Hi David. Just like to say that it’s a wonderful effort from you to help us in the preparation of these competitive exams.Your articles and tutorials are really very helpful and informative while remaining easy and understandable. Thanks you and hope you keep up your good efforts.
Hi,
Both of the articles that you have put up is amazing. Thanks a lot for these.
I am academically an Engineer and MBA (Information Systems) working in an Insurance firm as a Operations Strategy Manager. Earlier I have worked with IT firms as BFSI consultant. I am planning to give CFA Level 1 and FRM together this year. Is this viable or having both the credentials would have a negative aspect in my CV?
hi david, i’m a degree holder in financial engineering...im currently confused whether to go for master in Financial Engineering, CFA or FRM…
Hi David, I am an M.Sc in statistics working for a statistical and financial risk software( like- Palisade ) development company.What should be better for me FRM or CFA?
Please suggest me.
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