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the question as it's worded should yield +3. Am I correct? i.e +6.75 from LIBOR payments, +6 from depreciation in the underlying's value, -9.75 from interest pymts. If someone can confirm that'd be great. Many thanks

Hi David, am a bit confused about the Modigliani, and its use. I see elsewhere that the formula is given as RFR + (sharpe ratio) * (volatility of market) --(1) But you use it in the way to calculate the return in answer to your questions -- (2)...

I DO like Shakti's proof, but I don't understand this conceptually. if sharpe's denominator includes both beta and idiosyncratic risk factors, per choice a if assets have identical correlations to the market (so let's say beta=1 for the assets) then how can both sharpe's and treynor's...

That helps a lot David! Many thanks! :)

quick question... if we have 3 VaR for market op and credit risks, can we simply not add them up to get aggregate var? I just ran into a question where the values are squared then added then square rooted... what am i missing? thanks!

Hi David, Hope all's wel. Something picked my interest: In comparing Var with Lar - shouldn't "short-term exposure on a portfolio of long Euro-style options" be the same as "long-term exposure on a portfolio of short Euro-style options"? Aren't in both cases we have Var exceeding Lar? options...

indeed. using the leverage equity return, the 303.3 lends itself to solution by itself <so to speak> R(e) = L * R(a) - ( L - 1) * R(d) 15 = 5L + 4 - 4L --> 11 = L hence leverage 11%

thanks - was wrecking my brains over this.. :) also FYI, you mention somewhere that ES has no glaring weakness against the criteria of "not being intuitive", "not being coherent", and "not being stable". While I agree with the first 2, I think it's not stable as a measure. Here's something I...

Hi David and/or others, another rather easy (i think) question.. one from practice FRM. Asset worth 1 million whose 95th percentile Var is 100,000 (using parametric method with normal distribution). Suppose the bid-ask spread has mean of .1 and st. deviation of .3 What's the 95th percentile...

on the topic of econ capital vs reg capital.. do you agree with the following statements: "economic capital can be used to validate a firm's regulatory capital requirement against its own assessment of the risks it's running" and "since regulatory capital models and economic capital models...

Hi David, here's a question out of Schweiser challenge problem set (similar to Glen's question but a bit more "twisted") You are holding 100 shares at USD 30. Daily historical mean and volatility of returns are 2% and 3%. Bid-ask spread daily historical mean and volatility is 0.5% and 1%...

yes it does! so I assume the answer would be LVAR = Var + LC LVAR = 1 mil * (1 - e^(.2)*(1.645)) + [1 + (.029/2[1 - e^(.2)(1.645))] then, correct? Thanks much!

Hi David, do you think we'd be expected to know Basel III stuff on a granular level ie. do we have to know the ASF assigned for each asset or liability item for NSFR's calculation? On a tangent, do we have to memorise really cumbersome formulae as well? I remember from Part I that, really tough...

I like your summary Juan. My only addition would be the operational risk aspect in the MF case, related to their earlier Dooley trade on wheat (he went short breaching the limits and this wasn't picked up by the internal control systems). Another point about the op risk is the friction b/w...

Hi David, a small (and probably an easy to answer) question... hope you can help me with this one. A sample exam question at the back of GARP book (#2) calculates the liquidity cost as = (portfolio * .5 * spread/stock price) to get the answer, whereas Dodd gives that formula as portfolio * .5...

nvm - see that it's covered here: https://forum.bionicturtle.com/threads/2010-level-ii-sample-question.4818/

Here's a related question I have on the ERM topic... "With non-normal distributions, the use of correlations estimated using historical data from a stable period may not adequately capture how extreme returns from one type of risk are related to extreme returns of another type of risk." -- This...

Hi David, This may be a very simple question but at the risk of displaying my ignorance... Dowd defines VaR as P[1-e^(u - standard deviation * Z value)] I just want to make sure I understand this correctly. It's the multiplication of portfolio value with cumulative probability of default. I...

Thanks David - apparently I was getting the wrong N(d1) -- looked up the wrong # on the table :(

Yes! Now it makes more sense. Here's what I learned since I posted that question: external data needs to be scaling to offset certain biases they intrinsically have (namely, scale --big firms have big loss, small/small--, truncating --no capture of data below a certain threshold--, and data...