Covariance-Correlation Matrix

[Hend Abuenein]

Hello David,

I see some stress on solving through matrix multiplication in the mapping for linear derivatives. P2 /T5
Is this made easy somewhere on the site?
I find it very complex.
What are the chances we'd get a question that asks for results of a correlation matrix multiplication for VaR measurement? Something similar appeared in GARP's 2011 part 1 practice exams.

Thanks

 

[David Harper CFA FRM]

Hi Hend,

You might find my 7-min YouTube video on the covariance matrix helpful:

Otherwise, I do agree that the matrices in VaR mapping are non-trivial; I rendered some of them in the matching learning XLS @ http://www.bionicturtle.com/how-to/spreadsheet/2011.t5.c.2.-var-mapping-jorion
... I think they are intermediate/advanced and non-trivial and do require careful study

At the same time, from a practical standpoint, the testability of matrix math in the context of VaR mapping is extremely low; e.g., part of my feedback to GARP has been that those AIMs should remain qualitative and GARP has evolved the AIM language of Jorion Chapter 11 (VaR Mapping) so that the AIMS are generally "explain ","discuss" and "describe" and, please note, there is only one "Map a fixed income ...." In fact, the whole VaR mapping chapter has received scant historical testing to my knowledge. (as just a tactical matter, just a "basic" matrix multiplication to produce a portfolio VaR, by hand is probably too time consuming for the exam!)

I hope that helps, thanks, David