FRM Part I Formulas

all formula in FRM part I

The Financial Risk Manager (FRM) Part I exam covers a wide array of formulas across several
key areas in risk management. Here's a list of the most essential formulas you'll need to
know:

1. Time Value of Money (TVM)

Present Value (PV):
FV
PV = (1+r)n

Future Value (FV):

F V = P V × (1 + r)n
Interest Rate (r):
1
r = ( FP VV ) n − 1
​

Number of Periods (n):

ln(F V /P V )
n= ln(1+r)
​

2. Probability and Statistics

Variance of a Portfolio:
Var(RP ) = w12 Var(R1 ) + w22 Var(R2 ) + 2w1 w2 Cov(R1 , R2 )
​ ​ ​ ​ ​ ​ ​ ​ ​

Standard Deviation (Volatility):

σP =​
Var(RP ) ​ ​

Covariance:
Cov(R1 , R2 ) = E[(R1 − μ1 )(R2 − μ2 )]
​ ​ ​ ​ ​ ​

Correlation:
Cov(R1 ,R2 )
ρR1 ,R2 =
​ ​

σ1 σ2
​ ​

​ ​

​ ​

3. Risk-Return Measures
Sharpe Ratio:
E(RP )−Rf
Sharpe Ratio =
​ ​

σP
​

Jensen's Alpha:
α = RP − [Rf + β(Rm − Rf )]
​ ​ ​ ​

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 Treynor Ratio:
E(RP )−Rf
Treynor Ratio =
​ ​

βP
​

Information Ratio:
E(RP )−Rb
Information Ratio = σϵ
​

​
​

Beta (Systematic Risk):

Cov(RP ,Rm )
β=
​ ​

Var(Rm )
​

4. Value at Risk (VaR)

Parametric VaR:
VaR = μ − Zα × σ where Zα is the Z-score corresponding to the confidence level
​ ​

(e.g., 1.96 for 95%).

Historical VaR:
Use the historical data to directly find the lowest percentile value for the given
confidence level.

Monte Carlo VaR:

Simulate random outcomes based on the asset's risk factors and calculate the percentile
of the distribution.

5. Fixed Income
Duration (Macaulay):
∑nt=1 t×Ct /(1+r)t
D=
​ ​

P
​

Modified Duration:
D∗ = D
(1+r)
​

Convexity:
∑nt=1 t(t+1)×Ct /(1+r)t+2
C=
​ ​

P ​

Bond Price:
n Ct
P = ∑t=1 ​

(1+r)t
​

6. Capital Asset Pricing Model (CAPM)

Expected Return:
E(Ri ) = Rf + βi × (E(Rm ) − Rf )
​ ​ ​ ​ ​

Beta:
Cov(Ri ,Rm )
β=
​ ​

Var(Rm ) ​
​

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7. Portfolio Theory
Expected Return of a Portfolio:
E(RP ) = w1 E (R1 ) + w2 E (R2 )
​ ​ ​ ​ ​

Portfolio Variance (for two assets):

Var(RP ) = w12 Var(R1 ) + w22 Var(R2 ) + 2w1 w2 Cov(R1 , R2 )
​ ​ ​ ​ ​ ​ ​ ​ ​

8. Option Pricing
Black-Scholes Model:
C = S0 N (d1 ) − Xe−rT N (d2 ) where
​ ​ ​

2
d1 = ln(S0 /X)+(r+σ
​

σ T
/2)T
​

​
​

d2 = d1 − σ T
​ ​ ​

Put Option (Black-Scholes):

P = Xe−rT N (−d2 ) − S0 N (−d1 ) ​ ​ ​

9. Credit Risk
Credit Spread:
Credit Spread = Yield of Risky Bond − Yield of Risk-Free Bond
Expected Default Frequency (EDF):
This is a complex calculation involving default probabilities, credit spreads, and other
factors.

10. Interest Rate Models

Simple Interest:
I =P ×r×t
Compound Interest:
A = P × (1 + r/n)nt where A is the future value, P is the principal, r is the annual
rate, and n is the number of compounding periods.

These formulas cover a lot of what you'll encounter on the FRM Part I exam. You'll also need
to understand how they relate to risk management practices and how to apply them in
different contexts. Be sure to practice using these formulas with real-world data to get
comfortable before your exam!

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