P1. T1 RAPM other approaches

[MSO]

I think GARP study notes covers recently developed Risk-Adjusted Risk Measures which include: Morningstar rating system, Actuarial Approach, Modigliani, and Muralidhar.

I am not sure whether this is covered in BT notes elsewhere or there is any future plan to cover? Can someone provide inputs on the same?

Please excuse if this one is a repeated query or I am not updated on a different thread on similar topic.

 

[David Harper CFA FRM]

Hi @MSO As you are posting in P1.T1, I assume you refer to the longstanding RAPM reading (which has notes at https://learn.bionicturtle.com/topic/study-notes-amenc-chapter-4/ )

Noel Amenc and Veronique Le Sourd, Portfolio Theory and Performance Analysis (West Sussex, England: John Wiley & Sons, 2003).
Chapter 4. Applying the CAPM to Performance Measurement: Single-Index Performance Measurement Indicators (Section 4.2 only) [FRM–11; aka, R9.P1.T1]
After completing this reading you should be able to:

• Calculate, compare, and evaluate the Treynor measure, the Sharpe measure, and Jensen’s alpha.
• Compute and interpret tracking error, the information ratio, and the Sortino ratio.

... This reading previously additionally did also contain "Explain the Morningstar Rating System, VaR based, and management related risk-adjusted return measures." but that was back in 2013 and it was dropped in 2014. Your question makes me realize that I would like to refresh this note (but only to improve it against the same AIMs. @Nicole Seaman Do you agree we can add an refresh of the R9 Amenc to Deepa's list? I have an improved XLS and she can add a lot of value to this note IMO.

@MSO but w.r.t to Morningstar and Muralidhar as RAPMs, they appear nowhere in the 2017 syllabus. Let me know if I misunderstood you? Thanks!

 

[MSO]

Hi @David Harper CFA FRM Please excuse for troubling you a lot, probably, with very basic stuff.

Actually, I have subscribed to the course content from GARP as well, and all these form part of Chapter 11 (Foundations of Risk Management) on "Applying the CAPM to Performance Management" extracted from Chapter 4, Section 4.2 of Portfolio Theory and Performance Analysis by Noel Amenc and Veonique Le Sourd. These ratios are referenced in the section - Recently Developed Risk-Adjusted Return Measures - which include all these measures, as referenced in my query above.

 

[David Harper CFA FRM]

@MSO No problem, truly. I understand now, thanks! Those measures are part of Amenc's section 4.2.9, which is the final sub-section of 4.2, and as I mentioned 4.2.9 was assigned but only prior to 2014. Prior to that, they were included as far back as I can recall (~ 2009 or so) but I don't think they were ever directly tested ... a really longstanding reading like Amenc does tend to experience "seasoning" with respect to more accurate LOs. GARP gets feedback and does revise based on feedback. The Amenc reading is over a decade old, which doesn't matter for the traditional RAPM metrics, but as a Morningstar subscriber (and investor) I admit that I have a hard time discerning whether they actually use the RAR discussed in Amenc, FWIW (I always did! ... I mean I've read Amenc but I don't experience those in my morningstar view ....) . Here is the latest Morningstar methodology report: http://trtl.bz/morningstar-ratings-method-2016 In any case, thanks for the clarification!

 

[MSO]

Thanks @David Harper CFA FRM one last quick confirmation. Would this mean we should leave this section, I mean reading is fine and probably one understands a bit of theory, unlike how it is explained on your notes and videos , but should one not bother about it as was the case in previous years. Please excuse for repeating this query.

 

[David Harper CFA FRM]

@MSO No worries! Yes, you can safely omit Amenc 4.2.9; i.e, Morningstar, actuarial, Muralidhar will not appear on the FRM exam. Given the exam's tracking error, I do not normally express such confidence, but as I mentioned, we have many years of exposure to Amenc vis à vis the exam. With respect to Modigliani, study would not be wasted because, although it also will not appear in Part 1, it is the same concept as Modigliani-squared in 2017 Part 2.T8. Bodie Chapter 27 LO "Describe the uses for the Modigliani-squared and Treynor’s measure in comparing two portfolios, and the graphical representation of these measures." (but bodie has a much better explainer anyway). I hope that answers!

 

[emilioalzamora1]

Hi @David Harper CFA FRM,

I also think Amenc is still a valuable reading, even if it does NOT come with a lot of background (derivation) etc. about performance measures it summarises some pros and cons of the measures in quite a good fashion.

For the keen FRM exam taker or mere forum reader I do prefer/recommend Jack Clark Francis "Modern Portfolio Theory" (not only for the explanations of the basic performance measures but for the whole CAPM background incl. derivations and proofs as well).

As David said, anything beyond Treynor, Sharpe, Information Ratio and Sortino (even the latter one is already rare in the FRM) will only be tested in exams like the CIPM or CAIA.

A little digression here: funnily the M^2-measure originated at the dinner table when Franco and his granddaughter Leah Modigliani came together and she told him how poorly performance measurement is done in practice (mainly referring to the weaknesses of the Sharpe-Ratio). This literally then gave birth to the so called Modigliani-Modigliani-measure (referring to Franco and Leah > M^2).

I have done some manipulation on how Morningstar calculate their Risk-Adjusted Return (MRAR) with a certain level of risk aversion. However, I guess no one really uses this measure today or has even heard about it.

If someone is curious how it works please do let me know. Happy to share it.

 

[David Harper CFA FRM]

Thank you @emilioalzamora1! Great recommendation for MPT, see here https://forum.bionicturtle.com/resources/modern-portfolio-theory.133/

 

[emilioalzamora1]

Again, my recommendation for Francis' book was totally independent from your upload to the forum. Did not even know that you have attached it. Excellent stuff!

By the way, even if this is quite a bold question: have you modelled/replicated Chapter 17 (Portfolio Construction & Selection) of Francis' book? Section 17.6 is very interesting.

 

[David Harper CFA FRM]

@emilioalzamora1 Thanks! I have not modeled but I am a sucker for a dare to model something ...

 

[emilioalzamora1]

Ok, brilliant, David. As the exam is approaching and the forum will be very busy I will try to manage it myself!