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That's very helpful, thank you!

Hi David, Two questions regarding hypothesis testing: (1) Autocorrelation is the correlation between 2 error terms and serial correlation is the correlation between two residual terms. Doesn't that mean that autocorrelation and serial correlation are effectively interchangeable? (2)...

Hi David, I'm trying to grasp the big picture regarding var. a) In general -- if there were NO exceedes in VAR (supposing you have a VAR model and evaluating the effectiveness of the model), then you would say that the model is not a very good one, and it's set too low, as you would...

I see. So if the BSM for a dividend call is: So^(-qt)(d1) - Ke^(-rt)(d2), should I still account for q in the d1 calc? i.e. should d1 be: d1 = ln(s/k)+(r-q+(s.d.^2/2))T/(s.d.*sigmaT) or should it simply be ln(s/k)+(r+(s.d.^2/2))T/(s.d.*sigmaT)? In other words, if we account for q...

Hi, For put deltas: e^(-qt)x(N(d1) - 1) Do we first derive the N(d1) value from the Z table, and then subtract that value by 1? I know how to calculate the deltas for a call, and the N(d1) derivation is straightfoward, however, I am a bit thrown off the put delta, and wanted to make...

Hi David, I have a general question regarding the calculation of dividends for the BSM model (also relates to Put/Call parity, COC, etc). In the BSM (for dividend-paying bonds)-- we have: Value of a call = So(d1) - Ke^(-r-q)t(d2) " " put = Ke^(-r-q)t(1-d2) - So(1-d1) Where d1 =...

17. Assume that a hedge fund provides a large positive alpha. The fund can take leveraged long and short positions in stocks. The market went up over the period. Based on this information, a. if the fund has net positive beta, all of the alpha must come from the market. b. if the fund has...

Hi David, I have a question regarding the reduction of systematic (i.e. nondiversifiable risk) and its impact on firms: I've read two separate points which confuse me: (1) from a previous FRM practice q: "reducing firm systematic risk by strategies that REDUCE costs will INCREASE firm...

THank you David. My follow-ups: (1) How is this linked -- if at all, to the fact that the convenience yield (y) is less than the rfr? (Since future price is greater than spot). (2) Since this is a case of contengo (futures price greatre than spot) -- wouldn't we know that the...

12. The 3-month futures contract of a certain index is priced at $1,020. Its underlying is valued at $1,010 and pays a continuous dividend rate of 1%. If the current risk-free rate is 2.75%, the arbitrage profit opportunity is closest to: a. $7.50 b. $5.57 c. $10.00 d...

I have a question regarding the calculation of binomials: 1. The stock price is currently $80. The stock price annul up-move factor is 1.15. The risk-free is 3.9%. the value of a 2-year European call option with an exercise price of $62 using a two-step binomial model is closest to: a...

Thanks -- I just redid it! I realize that this question is simply testing your knoweledge of the Portfolio Variance formula -- with a little bit of a twist, because instead of giving you the covariance, they give you the correlation btw x and y. I suppose this means that Covariance =...

#4. Given two random variables X and Y, what is the Variance of X given Variance[Y] = 100, Variance [4X - 3Y] = 2,700 and the correlation between X and Y is 0.5? a. 56.3 b. 113.3 c. 159.9 d. 225.0 Answer: d a. Incorrect. +3 was used instead of -3 when solving. Variance [4X - 3Y] =...

Hi, Are all of these formula sheets for Level 1? Or are some of them for Level 2? (I'm only interested in Level 1). Also -- when I clicked on the first link -- http://www.bionicturtle.com/how-to/notes/category/risk-frm/ i couldn't find any of the formula sheets -- is there a link that...

Hi -- I was listening to David's level 1 review -- and he mentioned the FORMULA sheet which should be up for test-takers... can you please let me know where I can find FORMULA sheet? Thanks!