Blog Week in Risk (November 11th)

[David Harper CFA FRM]

In the forum (selected only)

• [P1.T1] Thank you @evelyn.peng for the insight on why (in the mean-variance framework) the predicted variance is always greater than historical variance https://trtl.bz/2qwDLFK
• [P1.T1] A typical pattern-like question for the CAPM/SML cluster https://trtl.bz/2FgiIRV
• [P1.T1] Is there any shortcuts to utilizing the risk-adjusted performance measures (RAPMs; e.g., Sharpe, Treynor)? https://trtl.bz/2qCGfSP
• [P1.T1] Good question by @flosoma about the interpretation of the APT as an ex post and/or ex ante model https://trtl.bz/2FizBvo
• [P1.T2] Bayes Theorem in English: Posterior = (Likelihood*Prior)/Evidence https://trtl.bz/2F4rnXl
• [P1.T2] An FRM candidate should be comfortable with covariance(X,Y) = σ(X,Y) = E(XY) - E(X)*E(Y) and its relationship to indendent variables https://trtl.bz/2quHKlU
• [P1.T2 Hull EOC 10.21] GARCH(1,1) parameters https://trtl.bz/2qDe2v8
• [GARP P1.T3*] Is there an easy way to relate the directional relationship between futures prices and interest rates? https://trtl.bz/2Ff46lR
• [P1.T3] Thank you, again, @flosoma for the reminder thank you can use the calculators [2nd] + [Bond] function to retrieve the clean price! https://trtl.bz/2quGkrT
• [P1.T3 GARP P1.59] On the importance of proper foreign exchange (FX) quote convention https://forum.bionicturtle.com/threads/2016-mock-exam-question-59.21938/
• [P1.T3 GARP P1.35] What's the payoff diagram look like for a synthetic commodity? https://forum.bionicturtle.com/threads/garp-practice-exam-2018-q35.21929/
• [P1.T3] An FRM candidate should understand clearly the basics of option terminology including intrinsic value, moneyness, premium, profit and payoff https://trtl.bz/2qzFKsN
• [P1.T4] Breaking down the rebalancing implied by a dynamic delta hedge https://trtl.bz/2QisxQl
• [P1.T4] Applying the formula for expected shortfall (ES) when the distribution is discrete https://trtl.bz/2QjX3t2
• [P1.T4] Breaking down the two basic steps in a binomial option pricing model https://trtl.bz/2QmfFbQ
• [P1.T4 GARP] Flawed question leads to confusion about relative versus absolute VaR https://trtl.bz/2qEdKEt
• [P2.T6] Does an asset swap hedge against credit or market risk? https://trtl.bz/2FadUgZ
• [P2.T6] Does credit value at risk (CVaR) include or exclude expected loss (EL)? https://trtl.bz/2F7cEuZ
• [P2.T6] On the calculation of excess spread https://trtl.bz/2qFtGX8
• [P2.T6] What is the difference (in Malz) between a reduced-form and a factor-based credit risk model? https://trtl.bz/2qCvM9V
• [P2.T7] FRTB, ES waterfall practical application https://forum.bionicturtle.com/threads/frtb-es-waterfall-practical-application.21931/
• [P2.T8 GARP P2.24] Surplus at risk (SaR) is challenging mostly because of the definitions https://forum.bionicturtle.com/threads/garp-p2-question-24.21932/
• [P2.T8*] Conceptual clarity on the formulation of alpha https://trtl.bz/2QrJEzq
• [P2.T8*] What does Grinold mean by scaling and trimming alphas? https://trtl.bz/2quFoUp
• [P2.T8] We can alternatively solve surplus at risk (SaR) by calculation surplus volatility as a percentage (it's just not obvious sometimes) https://trtl.bz/2qwj5gQ
• [P2.T8] Understanding how regressions translate into factor-based benchmark portfolios https://trtl.bz/2qx7fDb

External

Banking

• Wells Fargo reports another internal error that caused a failure to offer mortgage loan modifications to 545 borrows who consequently lost their homes https://trtl.bz/2F84hzp
• Banks in the changing world of financial intermediation https://trtl.bz/2FiiObB
• Hedge Funds Revive the Junk Bond CDO (Hedge funds are using financial engineering common before the financial crisis to borrow money and buy high-yield bonds) https://www.wsj.com/articles/hedge-funds-revive-the-junk-bond-cdo-1541592000
• Fed to Further Overhaul Stress-Testing Regime, Making it Easier for Banks to Pass https://trtl.bz/2FqxfL4

Risk

• New Supervisory Rating System for Large Banking Organizations https://trtl.bz/2FtIjHl
• Data Is Revolutionizing Risk Finance—Here’s How https://trtl.bz/2qHgj8U
• From Cars to Cornflakes, Libor’s Departure Will Ripple through Corporate America https://trtl.bz/2FeK4HW
• How to compute the VaR: Step-by-Step Excel Guide (with spreadsheet) by Deriscope https://blog.deriscope.com/index.php/en/excel-value-at-risk
• About Riskalyze GPA https://kb.riskalyze.com/article/351-about-riskalyze-gpa GPA is a risk-adjusted performance measure (RAPM) and is their second metric release
• A Toe in the Water: Trading Risk Panel Discusses U.S. Flood Risk Opportunities https://trtl.bz/2FixMyk
• New eBook: Set Up Your FAIR Program in 7 Steps https://www.risklens.com/blog/new-ebook-set-up-your-fair-program-in-7-steps
• The Lessons From Last Year’s Catastrophes https://www.rms.com/blog/2018/11/09/the-lessons-from-last-years-catastrophes/

Governance

• Seth Levine’s Designing the Ideal Board Meeting Blog Series https://trtl.bz/2qJigRT
• Glass Lewis’ Shareholder Initiative Guidelines https://corpgov.law.harvard.edu/2018/11/09/glass-lewis-shareholder-initiative-guidelines/
• Emerging Practice in Long-Term Plans https://corpgov.law.harvard.edu/2018/11/09/emerging-practice-in-long-term-plans/

Investing

• Alpha within Factors https://osam.com/Commentary/alpha-within-factors "At OSAM, we measure valuation using a composite index that takes inputs from the P/E ratio, the enterprise-value-to-ebitda ratio, the enterprise-value-to-free-cash-flow ratio and the price-to-sales ratio. In testing, we've found that this approach generates excess returns that are smoother and more consistent than the metrics in isolation."
• The Radical Saving (aka, FIRE) Trend Is Based on Fantasy https://trtl.bz/2FtHWwr
• Quants Are Facing a Crisis of Confidence https://trtl.bz/2qEAu74
• Buffett’s Underrated Investment Attribute http://basehitinvesting.com/buffetts-underrated-investment-attribute/

Quantitative

• Introduction to quantitative finance part I: Stylized facts of asset returns https://trtl.bz/2qxPHae
• Flirting — An Exercise in Bayesian Statistics https://trtl.bz/2qDAQLw
• Linear Regression in Real Life https://www.dataquest.io/blog/linear-regression-in-real-life/
• Two Ways You Can Use Small Sample Sizes to Measure Anything https://trtl.bz/2qFLJMR
• The McRib Effect (Why Understanding Causality is So Difficult) https://ofdollarsanddata.com/the-mcrib-effect/
• Principal Component Analysis: Your Tutorial and Code https://trtl.bz/2FexXeg

Career

• 8 Timeless Skills to Learn Now in Under 8 Hours to Change your Life Forever https://trtl.bz/2qHgZLb
• The Math Behind The 5-Hour Rule: Why You Need To Learn 1 Hour Per Day Just To Stay Relevant https://trtl.bz/2qEz0tw
• Want to Become a Data Engineer? Here’s a Comprehensive List of Resources to get Started https://trtl.bz/2qIkn8K
• Wall Street Analysts Are Now Selling More Data, Less Analysis (wsj.com) https://trtl.bz/2qIflsU

Other

• The Longevity Opportunity https://hbr.org/2018/11/the-longevity-opportunity
• Origins and Challenges of a Strong Dollar http://econbrowser.com/archives/2018/11/origins-and-challenges-of-a-strong-dollar