FAQ Before Exam Using the Learning Spreadsheets

[mary1997]

Hello.

Please help me. I don't understand what’s going on in the spreadsheet. Please explain it to me.
I just started learning the FRM Part 1. Now, I'm in the "Introduction to Foundations of Risk Management" topic. Then, I am stuck understanding the Sheet Index T.T

 

[Clay Carter]

Hello.

Please help me. I don't understand what’s going on in the spreadsheet. Please explain it to me.
I just started learning the FRM Part 1. Now, I'm in the "Introduction to Foundations of Risk Management" topic. Then, I am stuck understanding the Sheet Index T.T

@mary1997 Hi Mary, in the spreadsheet the yellow boxes are numbers that you can plug in. The colored boxes are the output. So on the first tab of the spreadsheet you can see how increasing your confidence interval increase the VaR. The same for volatility as you increase your volatility you will again see how the VaR increases. On the righthand side of this spreadsheet you can see how VaR changes when you have a 2-asset portfolio. Remember here that as our correlation decreases the more diversification we gain and thus the lower our VaR will be.

I hope this helps,

Feel free to reach out with other questions.

Kindly,
CC

 

[HFost5088]

Hi Clay, thanks for you response. So essentially the purpose of this spreadsheet is to play with inputs and see impact on outputs. i.e. play around and get a feel for how VaR works, rather than understand the "math" behind the formula's?
Or if the intentions is to try to understand the math, is there perhaps an explainer on this?

Thanks very much,
Howard

 

[Clay Carter]

Hi Clay, thanks for you response. So essentially the purpose of this spreadsheet is to play with inputs and see impact on outputs. i.e. play around and get a feel for how VaR works, rather than understand the "math" behind the formula's?
Or if the intentions is to try to understand the math, is there perhaps an explainer on this?

Thanks very much,
Howard

@HFost5088 Hi Howard, essentially each spreadsheet is built so that you can see how the answer is derived and play with the inputs. From my experience, being able to change inputs and see how different factors change an outcome helps me understand the model better.

One of the moments where this really clicked was when I walked a student through a portfolio VaR spreadsheet and let him change the correlation assumption himself. On paper, correlation feels abstract, but once he increased correlation toward 1 and watched the portfolio VaR converge to the weighted average of the individual VaRs, and then lowered it and saw diversification actually reduce risk but also how correlation impacts our overall portfolio.

Every question/spreadsheet is a little different because every model is slightly different. But in general the spreadsheets are a great tool, in my opinion, for understanding the questions on a deeper level.