Financial Risk Manager

Can beta be negative ?

2008-10-03T20:27:12-08:00

Hi David,

Given the formula of beta (slide 16), I was thinking hard that can beta be negative and if yes then what will be the impact on the expected return?

Considering the formula = Beta = Cov (m,i)/var m, if we use the formula for correlation then this will become Beta = correlation(m,i) * var i , now if this is correct, then in case if the security is having negative correlation then beta should be negative.

But how do we interpret negative beta, and are there any securities with negative beta…

In addition to this, is there any relation between CML and SML ?

Look fwd to your guidance on this..

thnx
OM

SAR aand security selection in downstreaming

2008-11-03T20:15:13-08:00

Is SAR Stock appreciation rate? What exactly is security selection in downstreaming?
It is in the risk budgeting vs asset allocation section which is not even found in Schweser.

Sortino Ratio

2008-11-03T20:02:14-08:00

Hi David,

Regarding Sortino ratio I am not clear on what the denominator represents. Went through Wikipedia and it saysdenominator is the downside risk
“The downside risk is the target semideviation = square root of the target semivariance (TSV). TSV is the return distribution’s lower-partial moment of degree 2 (LPM2).”

FRM 2008 practice question says “Semi standard deviation” . What I wanted to understand is why is Sortino ratio used? Is it for that are not well diversified ? What does the denominator represent?

Regards
Ravi

Optimal Capital Structure

2008-11-12T10:10:33-08:00

Hi David,

Referring to 2007 , investment round 1 -question 12 . You have asked the optimal structure of a firm strikes a balance between which two costly extremes. The explanation is :

“At the one extreme is 100% equity-financed company. Equity is more costly than debt, so this firm generally does not have an optimal cost structure: it can swap (replace) costly equity with cheaper debt. But at the other extreme is the unrealistic example of a company that is 100% debt-financed. At some point, the leverage is too high, and the threat of financial distress will cause marginal interest rates to make the debt more expensive than equity. Therefore, the optimal structure is somewhere between an entirely equity-financed company (i.e., the high cost of equity) and an entirely debt-financed company (i.e., the high cost of financial distress)”

But the correct answer is :"Cost of equity and cost of financial distress”.Should it not be cost of equity and cost of debt?

Is this correct ?

Regards
Ravi

Portfolio Alpha

2008-11-11T13:03:22-08:00

Hi,

thanks for quick response! really!

following is a question from FRM HandBook

EXAMPLE16.5:PERFORMANCEEVALUATION

Assume that a hedge fund provides a large positive alpha.The fund can take
leveraged long and short positions in stocks.The market went up over the
period.Based on this information,
a. If the fund has net positive beta,all of the alpha must come from the
market.
b. If the fund has net negative beta,part of the alpha comes from the market.
c. If the fund has net positive beta,part of the alpha comes from themarket.
d. If the fund has net negative beta,all of the alpha must come from the
market.

Rp - Rf = a + B(Rm-Rf) -> a is alpha right?

the answer is c.

-> explanation : Because the market went up,a portfolio with positive beta will have part of
its positive performance due to the market effect

i understand it but we should think about alpha
having a look at that equation, alpha and beta term are separated
how can i decide?

semi standard deviation

2008-11-11T09:18:51-08:00

Hi,

in 08 practice exam part i

no.35 , it’s about calculating semi-SD

answer is d.9.08% which is from (12.2%-4.75%) / 0.82

but i’m confused why riskfree rate is used,

normally minimum acceptable return(MAR) is used, isn’t it?

suk

VaR Portfolio and individual VaR

2008-11-03T20:12:34-08:00

In the porfolio VaR formula we have sigma(P)
But the cross term in the sigma(P) formula has wi wjrhosigma(i)sigma(j) without a 2 which is missing I think.
Also it is know that VaR is not coherent and hence not subadditive then how come we can add component wise Var to get total VaR which looks like a subadditive property.

CAPM - Equilibrium Theory

2008-10-26T08:23:54-08:00

In the study notes for CAPM Equilibrium Theory:

1) All assets must be held in portfolios, including the risky asset portfolio.

Sounds simple, but I’m not getting the importance of it. What does this mean? Why is this important?

Investment A, Part 1 - Only 10 minutes?

2008-10-26T06:48:50-08:00

The investment A, Part 1 module is only 10 minutes. Did it get cutoff? It seems incomplete, because it ends with the introduction of the CAPM.

risk budgeting spreadsheet

2008-10-21T16:04:29-08:00

i have just a simple question about information ratio in the spread sheet

the IR of MGR1 and MGR2 are 0.6 and 0.4, respectively

how are they calculated??

the IR of portfolio at the bottom is 0.72 which is from 2.9%/4%

isnt it excess return devided by TEV??

but i can not get it of managers one

thanks!

suk