Question on volatility of equity

[sridhar]

On page 51/79 in the formula sheet -- at the very top, you have a formula for the volatility of equity...

What is "E" in the denominator -- I checked in the study notes.. You've it there as well, but no explanation of what "E" is?

--sridhar

 

[David Harper CFA FRM]

sridhar -

It shouldn't be in the formula sheet or the notes (it's part of the KMV derivation that produces the firm asset volatility and firm volatility; i.e., step #1 of the KMV approach estimates asset volatility given equity volatility as an input). It is not needed this year (2008 FRM). I just removed it and replaced it with two PD formulas (page 50): the de Servigny and the equivalent Stulz.

Plus i fixed the LGD typo on p 51 that you noticed. New version is 1a.

Thanks for your help

David