# How to correlate between the GARP material and Video here.

Discussion in 'P1.T1. Foundations of Risk (20%)' started by shubz2012, Jun 18, 2012.

1. ### shubz2012New Member

Hi
I am new member.
I went through the material provided by GARP for Foundation of Risk mgmt. - chapter 1
but could not correlate it with the video on the same topic.
I could not see much maths involved in first 2 chapters whereas the video shows the quantitative side(which makes sense).
Is it a good idea to first go thru the video then the material as provided by GARP ?

Regards
Shubhajit
2. ### Ankur SMember

Hi Shubhajit,

I like the idea of going though the video first to know what i am learning in a new chapter and once the video finishes, then you could read the garp core reading, BT notes, practice questions. Video is a concise and quick way to cover topics initially.

Hope this helps.
Ankur
• Like x 1

Hi Shibhajit,

I would highly recommend the videos by David. We most definitely get positive feedback on those as David reviews every individual AIM.

You might find Aleksander 's input helpful here: http://www.bionicturtle.com/forum/posts/18263/

Good luck!

Thanks,
Suzanne
4. ### thanalaNew Member

Hi Dave,

Reference: P1.T1 Amenc-Chapter 4 (questions 26 to 32)

My question is on 31.4 D. This is my understanding on Jensen's alpha --. Excess return (9%) less CAPM.
CAPM: Risk Free plus ((exp return from market less risk free return) * beta))
Risk free is 3.0 % exp return from mkt is 5% and beta is 0.8 . In the answers why is that 0.8 is multiplied by 5%? I do not see the CAPM equation here. Am I missing something here?
5. ### David Harper, CFA, FRM, CIPMDavid Harper

Hi thanala,

An "excess return" refers to excess over this riskfree; Grinold always uses excess returns, other do not. Best is to be comfortable with both.

This question (31.4) asks, emphasis mine, "Assume the riskfree rate is 3.0% and the price of risk (excess market return) is 5.0%. A manager's portfolio produces a return of 9.0% with 30% volatility and a CAPM beta of 0.8 (i.e., quantity of risk = 0.8). What is the (ex post or realized) Sharpe ratio?" (actual question below @ http://www.bionicturtle.com/forum/threads/l1-t1-31-sharpe-treynor-jensens.3460/)

The means the market's return = 8% or, equivalently, the market's excess return (aka, price of risk) = 8 - 3% = 5%. So that:
• Expected portfolio return per CAPM, if beta = 0.8 is given by: Rf + beta(E[M] - Rf) = 3% + 0.8*5% = 7%
• Jensen's alpha = Portfolio - E[per CAPM] = 9% - 7% = 2%
The answer given is doing this (is using CAPM),
Answer given is 9% - (0.8 *5%) - 3% = 2%
i.e., 9% portfolio - [Rf + beta*ERP]; ERP = equity risk premium or excess market return
• But we can also just deal in "excess returns," which turns out to be convenient in multi-factor models: if portfolio excess returns = 6%, then alpha = 6% - (beta*ERP) = 6% - (0.8*5%) = 2%.
I hope that explains, thanks
• Like x 1
6. ### thanalaNew Member

Yes. Thank you.
• Like x 1