Sep 04

New learning spreadsheets uploaded (Basel II, CAPM, RAPM)

by David Harper, CFA, FRM, CIPM

Yesterday I uploaded four learning spreadsheets to the member page (in preparation for the Investment Risk A episode). Plus I previously added two Basel II spreadsheets (since the last upload which focused on operational risk loss distribution approach [LDA] distributions). Please recall, since I have now uploaded over seventy (70) learning XLS devoted the the 2008 FRM, I color coded the more relevant sheets in yellow.

In the last batch:

Basel II standardized credit grid. Under the standardized approach to credit risk in Basel II, exposures are risk-weighted according to their external credit rating and their type (e.g., AA Corporate, BB+ retail). This spreadsheet shows the grid and dynamically computes the capital charge

Basel II internal ratings based (IRB) approach to credit risk. The IRB is “advanced” and consistent with the FRM candidate’s study of credit risk. This spreadsheet compactly calculates the capital charge employing the asymptotic single risk factor (ASRF) method used in IRB; i.e., idiosyncratic risk is diversified away in the credit portfolio and only the asset’s correlation to the systemic risk factor (proxy for macro-conomy) is counted

Illustration of correlation’s impact on portfolio returns/variance. Classic mean-variance finance, but if you’d like to take a closer look at scenarios…

Security Market Line (SML) and Capital Market Line (CML). These are classic but try not to take them for granted. Like countless finance texts, I tried to illustrate both with the simplest possible assumptions (a two-asset portfolio)
Grinold’s Performance Analysis: This spreadsheet implements the (tough) last section of the FRM assigned Chapter 17 (which will be reviewed in Monday’s screencast episode). Given two input series (active portfolio beta and benchmark excess returns), this shows the deconstruction of total active systemic return into its three components (expected active beta, beta surprise, and benchmark timing)

Risk-adjusted performance measures (RAPMs). Using the same SML (above), this illustrates Treynor, Sharpe, Jensen’s alpha, information ratio (IR) and the t-stat