We published today a quantitative primer for the 2007 FRM. A few of our customers asked for a refresher on quantitative methods. You can browse the one hour movie here. We thought it would help to review Greek notation, compounding/discounting, matrix math and first-order derivatives.

 

Understanding notation can help. Did you know Greek notation is used for population parameters and Roman letters denote sample statistics (parameter:population as statistic:sample).

 

What do we use for the discount rate? One way is build-up from the risk-free rate. Investors expect additional yield for additional risks; e.g., inflation, default, liquidity and maturity....

 

Discounting is just compounding in reverse....

 

We take a quick look at a correlation matrix (below; notice ones in the diagonals. Assets are perfectly correlated to themselves!) and a variance-covariance matrix.

 

Finally, we look at a first-order partial derivative. This is a key building block, both delta (for option price sensitivity) and duration (for bond price sensitivity) are based on this idea.

Comments

1. Mike Taylor 09 Jun 2007

   Thank you for the great primer!  I find your site very helpful.

   Keep up the great work!

   MT

2. David Harper, CFA, FRM, CIPM 10 Jun 2007

   Thanks for visiting Mike. If you have suggestions for other tutorials, I would love to hear them.

3. Pim 19 Jun 2007

   Thank you!  you help me a lot

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