Blog Archive

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• Variance of a random variable [quantitative] 19 Mar 2010

  AIM:  Define, calculate and interpret the variance of a random variable. The expectation of a random variable X is called the mean and typically denoted by Greek mu (µ). If X is a continuous random variable having a density function f(x), then the variance is given … read more

• Expected value of a random variable [quantitative] 19 Mar 2010

  AIM:  Define, calculate and interpret the expected value of a random variable. Expected value is the weighted average of possible values. In the case of a discrete random variable, expected value is given by: (EQUATION GOES HERE) In the case of a continuous random variable, expected … read more

• Metallgesellschaft L1 [practice, foundation] 18 Mar 2010

  33. In late 1993, Metallgesellschaft reported losses of approximately USD 1.5 billion in connection with the implementation of a hedging strategy in the oil futures market. In 1992, the company had begun a new strategy to sell petroleum to independent retailers, on a monthly basis, … read more

• Statistical independence [quantitative] 18 Mar 2010

  AIM:  Explain the difference between statistical independence and statistical dependence. Statistical independence is when the value taken by one variable has no effect on the value taken by the other variable. If the variables are independent, their joint probability will equal the product of their marginal. … read more

• Marginal versus conditional probability [quantitative] 18 Mar 2010

  AIM:  Describe marginal and conditional probability functions. Marginal probability A marginal (or unconditional) probability is the simple case: it is the probability that does not depend on a prior event or prior information. For example, for a single six-sided die, the probability of rolling a four, … read more

• Does risk management add value L1 [practice, foundation] 17 Mar 2010

  32. There are many reasons why risk management increases shareholder wealth. Which of the following risk management policies is least likely to increase shareholder wealth? [source: FRM 2010 practice exam] a.  Hedging strategies to lower the probability of financial distress and bankruptcy. b.  Risk management policies … read more

• Univariate versus multivariate [quantitative] 17 Mar 2010

  AIM:  Distinguish between univariate and multivariate probability density functions A single variable (univariate) probability distribution is concerned with only a single random variable; e.g., roll of a die, default of a single obligor. A multivariate probability density function concerns the outcome of an experiment with more … read more

• Density functions: pmf/pdf [quantitative] 17 Mar 2010

  AIM:  Describe and interpret the probability mass function, probability density function, and cumulative density function for a random variable. A random variable is characterized by a distribution. There are two types of variables (continuous versus discrete) and two typical, associated approaches to asking a question about … read more

• Cotton forward price L1 [practice, products] 16 Mar 2010

  31. The current spot price of cotton is USD 0.7409 per pound. The cost of storing and insuring cotton is USD 0.0042 per pound per month payable at the beginning of every month. The risk-free rate is 5%. A 3-month forward contract trades at USD … read more

• Bayes’ theorem [quantitative] 16 Mar 2010

  AIM:  Define Bayes’ theorem and apply Bayes' formula to determine the probability of an event. Bayes Theorem uses a prior probability to inform a conditional posterior (revised) probability probability. An Example of Bayes’ Theorem In the following example, assume a simplified model of reality: a Bernoulli … read more

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