Financial Risk Manager

SML, CML and CAPM

2009-05-04T03:23:40-08:00

Hi David,

First of all let me take the opportunity to let you know that the spread sheets and the videos you had uploaded had helped a lot to make the understanding better.

I still had a few questions in my mind and would like to throw them to you

• The SML line is defined to be the line that shows the relation between the returns and the beta for a particular security, then why is that in all example I see; Asset A and Asset B, and then we talk about correlation and covariance..
• The CAPM stands for Capital Asset Pricing Model; which gives me the impression that it can be used for any Asset in general; but the equation that we derive has a term of beta in it. I am under the impression that beta is used for Stocks, so how is that CAPM can be used for any asset

Thanks,
Sudeep

Question on T-Statistic

2010-03-14T20:36:48-08:00

Hi,

Page 33 of the study notes 2010 1 Foundation L1 mentions the value for the T-Statistic, but does not explain why this value is equal to Information ratio*sqrt(time period). It would be beneficial if any one can explain why this is so. The video tutorial skips this part of the calculation.

Thanks & Regards,
Agin

Foundations 1b Tutorial

2010-03-07T20:09:37-08:00

Hi David,

IIn slide 15, you summarised the firm’s different beta’s to show the hedging irrelevance proposition. My question is how did you calculate the different Expected Future Spot prices E(S)?

Thanks
Roy

Question on CML and Market Portfolio

2009-08-01T23:18:35-08:00

Hi David,

I am studying the diagram of Expected Return vs Volatility of a portfolio of risk free asset + risky asset. The diagram showed CML and the market portfolio which I have a question on. Points along the CML (Between risk free return and market portfolio) is a portfolio consisting of a % of risk free asset and a % of Market portfolio. How can we create a portfolio which lays on points along the CML (beyond the market portfolio) which has a expected return greater than those on the efficient frontier? I thought the maximum expected return is a portfolio of 100% in risky asset.

Best Regards,
Dennis

secondary securities?

2010-02-21T06:30:32-08:00

Hello,

In the first outline you describe secondary securities as “issued by banks and backed by primary
securities.”, Would please give me an example of secondary securities, and explain their what qualify a security as “secondary securities”. are CMO/MBS are example?

Thanks

CML & SML

2010-02-19T09:38:03-08:00

Hi David,

Can you upload some questions/numericals on CML and SML.
Though I have gone through the webinar, but still feel the need to actually work out some problems to have confidence.

Thanks

Systematic risk (positive beta) implies normal backwardation

2010-02-15T04:48:28-08:00

Hi David
Regarding Stultz Chapter 2 reading on hedging irrelvance proposition:

I do understand the general concept that as the beta increases the expected return from CAPM increases which then means a higher discount rate is applied. But am not able to make a link from this to normal backwardation. (You state in slide 16 that Systematic risk (positive beta) implies normal backwardation). Could you provide some more explaination on this?

Great videos on foundation 1a and 1b. Looking forward eagerly to the next set

Regards
Venu Nair

VAR aggregation

2009-09-22T18:25:08-08:00

Hi David,

Could you elaborate how VARs across assets can be aggregated?

Thanks.

Short Option Skewness

2009-12-16T06:02:49-08:00

I was recently going over chapter four of the FRM handbook when I came across the statement, “Relative to a symmetric distribution, a short option position has negative skewness, or a long left tail,” on page 100. Example 4.9 also states matter of fact, that “short option positions have long left tails.”

I was under the impression that a long call has a right tail. A short call also has a right tail although the right tail at some point would cross the x-axis and go negative.

For puts, I believe a long put has a left tail, whereas a short put also has a left tail although at some point the tail would go negative.

Would anyone care to comment? Much appreciated.

Good resource on construction models for Volatility Surface

2009-12-09T10:45:14-08:00

I was wondering if you have a good resource on basic model(s) for constructing a volatility surface. Hopefully something not too complex but with real world use. I’ve found quite a few online articles on Volatility Surfaces/ Cap Volatility Surfaces, etc., but so far all are a bit too technical; at the very least they don’t take you from 0 to having constructed a Volatility Surface. Anything you have is much appreciated.

Thanks.