FRM Level 2 , Nov 2012 : Post what you remember here

[HopeToPassLvl2]

Allied Irish Bank - John Rusnak - 2 options were very close - Inexperienced Manager/Inexp control ppl.

I chose 2nd because qstn asked wat led him to hide his fake Transactions. Inexperience of Manager will be too broad a reason in this context.

Managing tail risk: I remember the option as "POSITIVELY" correlated with tail risk and not Negatively .. did i read it wrong ? .. I chose 'Invest in US Treasury'

I felt that there's no such thing as negative correl to tail risk. Since tail risk cannot be diversified away, correlation does not matter. I answered the put (i might be mistaken tho this might have said call. If that's the case, im wrong) options as a hedge to tail risk.

 

[HopeToPassLvl2]

You are absolutely right! but still the answer is debatable because neither ES or Standard deviation are totally right answers...

I think VaR is the answer here. Let's not overanalyze the question. It clearly says a coherent risk measure and easy to understand. I read in schweser that ES is not easy to understand, but VaR is. And also, even if VaR is only a coherent risk measure for normal dist, it is still a coherent risk measure. That's why the answer is VaR.

 

[klartxt]

Responding to the tail risk question:
i'm pretty sure that the answer was invest in Treasuries. Here's why:
1) the choice with the put was short put, if i recall correctly. That would increase tail risk.
2) i remember a practice question where the investor shorted Treasuries to reduce tail risk and the question was whether she did the right thing - and the answer was: No, she should have gone long Treasuries. The short position increases the risk bc in crisis there is typically a flight to quality, so a long position would profit from increasing TR prices during crisis.

 

[HopeToPassLvl2]

I would say max(liq dur stock a, liq dur stock b) rather than min(liq dur stock a, liq dur stock b).

Oh yeah. Did not notice that.

 

[HopeToPassLvl2]

i'm pretty sure that the answer was invest in Treasuries. Here's why:
1) the choice with the put was short put, if i recall correctly. That would increase tail risk.
2) i remember a practice question where the investor shorted Treasuries to reduce tail risk and the question was whether she did the right thing - and the answer was: No, she should have gone long Treasuries. The short position increases the risk bc in crisis there is typically a flight to quality, so a long position would profit from increasing TR prices during crisis.

If it said short put. I am wrong here then.

 

[klartxt]

I think VaR is the answer here. Let's not overanalyze the question. It clearly says a coherent risk measure and easy to understand. I read in schweser that ES is not easy to understand, but VaR is. And also, even if VaR is only a coherent risk measure for normal dist, it is still a coherent risk measure. That's why the answer is VaR.

But then standard deviation would also be a coherent and easy to understand risk measure. It's not as clear cut as put here.

 

[nageshtheone]

I would say max(liq dur stock a, liq dur stock b) rather than min(liq dur stock a, liq dur stock b).

http://books.google.co.in/books?id=...idity duration" + "for the portfolio"&f=false

Please check this out.

 

[deaf rodent]

It was 9 days because the formula goes: min(liq dur stock a, liq dur stock b).

I think you added their liquidity durations that's why you arrived at 12 days.

Yip...I did that. Ok makes total sense...didn't think about that in the exam

 

[varun34by02]

As far as I remember the question was about coherence risk measure that is easy to interpret and definitely standard deviation is a wrong answer as it does not fulfill the axiom of translation invariance.

SD doesnt follow Monotonocity
VaR doesnt follow Sub-additivity
Spectral is way too complex
ES is coherent but it "MAY" be stable at times. - Best possible option !

 

[varun34by02]

I think VaR is the answer here. Let's not overanalyze the question. It clearly says a coherent risk measure and easy to understand. I read in schweser that ES is not easy to understand, but VaR is. And also, even if VaR is only a coherent risk measure for normal dist, it is still a coherent risk measure. That's why the answer is VaR.

VaR is not sub additive.. it fails 1/4 coherent risk measure attributes.

 

[varun34by02]

Yip...I did that. Ok makes total sense...didn't think about that in the exam

The same question was a part of May L2 Exam.. Over there I saw finally agreed answer as Weighted average..Something like $180 and $200 as weights resp...So I used the same here... If I can vaguely recollect, Igot about 8.8. and chose 9

 

[sleepybird]

This was a tricky question. The liability>asset choice was a trap for those who didn't pay close attention (almost got me). I chose subordination as the answer because, if I remember correctly, the reading says Overcollateralization is often created through subordination, but I could be wrong.

True. There was one option which states Value of MBS issued > value of underlying mortgage pool which is the opposite of the collateralization. Regarding the asset and liabilities concept, let me explain clearly. From a financial perspective, anything which generates revenue over a future period of time (in other words, provide economic benefits over the future) is an asset and the one which creates expenses over a period of time is a liability. So if a bank extends a loan to its customer, it is an asset for the bank as it will generate interest income over the future period. Similarly If it has taken a loan from other banks or central bank, then it is a liability for a bank since it has to pay interest in the future period. SPV is a separate entity and it has its own balance sheet. For a SPV, underlying mortgage pool is an asset coz it will generate income in the future and MBS or pass through securities is a liability. Your statement is correct. If assets are greater than liabilities, its a way of overcollateralizing. But in this case, underlying mortgage pool is an asset and liability is MBS/Pass-through securities. Hope I made it clear.

 

[sleepybird]

Standard deviation is not coherent because it fails monotonocity. I agree this was a tricky/flawed question.

ES is not easy to interpret...it is clearly mentioned in Schweser...I put Standard deviation instead! it's confusing...

 

[Imad]

I wish GARP would read this trail of feedbacks to see how confused we are about the answers. This is a evidence of how tricky the exam was...I hope at the end that everyone will pass!

 

[sleepybird]

Agreed and that's what I said in my earlier thread also. It forces me to decide which is more important? Being coherent or easy to understand? I chose coherent over easy to understand (ie I chose ES), but nobody knows the GARP answer.

Standard deviation is not coherent because it fails monotonocity. I agree this was a tricky/flawed question.

 

[[email protected]]

Does anyone remember the questions with the two MBS (1 year and 2 year), 2 yield curves and the question regarding nominal and z-spread?

I noticed yield curve 2 was much steeper for 2 years hence thought the difference between z spread and nominal spread would be most pronounced given MBS 2 and yield curve 2 (I believe)

 

[matmet]

Agreed and that's what I said in my earlier thread also. It forces me to decide which is more important? Being coherent or easy to understand? I chose coherent over easy to understand (ie I chose ES), but nobody knows the GARP answer.

Can anyone confirm that in the original reading (Dowd?) ES is characterized as being not easy to understand?

Maybe it was just a interpretation of the Schweser guys..

 

[klartxt]

same thing for the question about adding asset A or asset B to a portfolio:
- asset B had the higher Sharpe Ratio, but choice given was "Add A because higher Sharpe Ratio". Not correct.
- the asset with the higher info ratio was not the one they offered for adding it to the portfolio. Also not correct.
- the two choices left were equally "correct", but you weren't left with any good clue whether you should add A for its higher "excess" return or B for its lower volatility. Both possible.

The only thoughts I had was that it had to be Asset B (choice d) for the lower volatility, because you couldn't really calculate excess return since the benchmarks return was given as "last year: 7%" and the expected returns in the table for assets A and B were for a different period, namely next year, as "expected returns"

No one?

 

[shady007]

I wish GARP would read this trail of feedbacks to see how confused we are about the answers. This is a evidence of how tricky the exam was...I hope at the end that everyone will pass!

Tricky...lol...It was not tricky at all when it comes to qualitative questions....it was ambiguous...I really liked Part1 becoz it indeed tested the concepts, application, understanding...barring a few quantitative questions, my personal opinion is that part2 just tested the memory in depth..

 

[Jot]

klartxt, after going through the answers the first time I also thought that none of the answers can be correct. So what I finally did is to adjust the given past returns of the market fund (7% I think it was) with the betas of stock A and B (0.8 and 0.9 I believe) in order to get some forward looking/expected returns for the market fund. Then I re-calculated the IR with the adjusted market fund returns and this time the answer involving the IR was correct. Not sure if this is the right approach but it was the best I could come up with, everything else did not make any sense.