Bionic Turtle’s Week in Risk (ending November 11th)

Welcome to our Week in Risk! It is exam week, and our forum is full of informative FRM discussions that will help you to make sure you’ve learned the FRM concepts in depth for the exam on Saturday! Have a great week and good luck on the exam!

In the forum (selected only)

• [P1.T1] Thank you evelyn.peng for the insight on why (in the mean-variance framework) the predicted variance is always greater than historical variance https://trtl.bz/2qwDLFK
• [P1.T1] A typical pattern-like question for the CAPM/SML cluster https://trtl.bz/2FgiIRV
• [P1.T1] Is there any shortcuts to utilizing the risk-adjusted performance measures (RAPMs; e.g., Sharpe, Treynor)?  https://trtl.bz/2qCGfSP
• [P1.T1] Good question by flosoma about the interpretation of the APT as an ex post and/or ex ante model https://trtl.bz/2FizBvo
• [P1.T2] Bayes Theorem in English: Posterior = (Likelihood*Prior)/Evidence https://trtl.bz/2F4rnXl

• [P1.T2] An FRM candidate should be comfortable with covariance(X,Y) = σ(X,Y) = E(XY) – E(X)*E(Y) and its relationship to indendent variables https://trtl.bz/2quHKlU
• [P1.T2 Hull EOC 10.21] GARCH(1,1) parameters https://trtl.bz/2qDe2v8
• [GARP P1.T3*] Is there an easy way to relate the directional relationship between futures prices and interest rates?  https://trtl.bz/2Ff46lR
• [P1.T3] Thank you, again, flosoma for the reminder thank you can use the calculators [2nd] + [Bond] function to retrieve the clean price! https://trtl.bz/2quGkrT

• [P1.T3 GARP P1.59] On the importance of proper foreign exchange (FX) quote convention  https://www.bionicturtle.com/forum/threads/2016-mock-exam-question-59.21938/
• [P1.T3] An FRM candidate should understand clearly the basics of option terminology including intrinsic value, moneyness, premium, profit and payoff https://trtl.bz/2qzFKsN
• [P1.T3 GARP P1.35] What’s the payoff diagram look like for a synthetic commodity?  https://www.bionicturtle.com/forum/threads/garp-practice-exam-2018-q35.21929/

• [P1.T4] Breaking down the rebalancing implied by a dynamic delta hedge https://trtl.bz/2QisxQl
• [P1.T4] Applying the formula for expected shortfall (ES) when the distribution is discrete  https://trtl.bz/2QjX3t2
• [P1.T4] Breaking down the two basic steps in a binomial option pricing model https://trtl.bz/2QmfFbQ
• [P1.T4 GARP] Flawed question leads to confusion about relative versus absolute VaR   https://trtl.bz/2qEdKEt
• [P2.T6] Does an asset swap hedge against credit or market risk? https://trtl.bz/2FadUgZ
• [P2.T6] Does credit value at risk (CVaR) include or exclude expected loss (EL)? https://trtl.bz/2F7cEuZ
• [P2.T6] On the calculation of excess spread https://trtl.bz/2qFtGX8
• [P2.T6] What is the difference (in Malz) between a reduced-form and a factor-based credit risk model?   https://trtl.bz/2qCvM9V

• [P2.T7] FRTB, ES waterfall practical application https://www.bionicturtle.com/forum/threads/frtb-es-waterfall-practical-application.21931/
• [P2.T8 GARP P2.24] Surplus at risk (SaR) is challenging mostly because of the definitions  https://www.bionicturtle.com/forum/threads/garp-p2-question-24.21932/
• [P2.T8*] Conceptual clarity on the formulation of alpha https://trtl.bz/2QrJEzq

• [P2.T8*] What does Grinold mean by scaling and trimming alphas? https://trtl.bz/2quFoUp
• [P2.T8] We can alternatively solve surplus at risk (SaR) by calculation surplus volatility as a percentage (it’s just not obvious sometimes) https://trtl.bz/2qwj5gQ
• [P2.T8] Understanding how regressions translate into factor-based benchmark portfolios   https://trtl.bz/2qx7fDb

Banking

• Wells Fargo reports another internal error that caused a failure to offer mortgage loan modifications to 545 borrows who consequently lost their homes https://trtl.bz/2F84hzp
• Banks in the changing world of financial intermediation https://trtl.bz/2FiiObB

• Hedge Funds Revive the Junk Bond CDO (Hedge funds are using financial engineering common before the financial crisis to borrow money and buy high-yield bonds) https://www.wsj.com/articles/hedge-funds-revive-the-junk-bond-cdo-1541592000
• Fed to Further Overhaul Stress-Testing Regime, Making it Easier for Banks to Pass   https://trtl.bz/2FqxfL4

Risk

• New Supervisory Rating System for Large Banking Organizations https://trtl.bz/2FtIjHl
• Data Is Revolutionizing Risk Finance—Here’s How https://trtl.bz/2qHgj8U

• From Cars to Cornflakes, Libor’s Departure Will Ripple through Corporate America   https://trtl.bz/2FeK4HW
• A Toe in the Water: Trading Risk Panel Discusses U.S. Flood Risk Opportunities https://trtl.bz/2FixMyk
• How to compute the VaR: Step-by-Step Excel Guide (with spreadsheet) by Deriscope   https://blog.deriscope.com/index.php/en/excel-value-at-risk

• New eBook: Set Up Your FAIR Program in 7 Steps https://www.risklens.com/blog/new-ebook-set-up-your-fair-program-in-7-steps
• The Lessons From Last Year’s Catastrophes https://www.rms.com/blog/2018/11/09/the-lessons-from-last-years-catastrophes/
• About Riskalyze GPA https://kb.riskalyze.com/article/351-about-riskalyze-gpa GPA is a risk-adjusted performance measure (RAPM) and is their second metric release

Governance

• Seth Levine’s Designing the Ideal Board Meeting Blog Series https://trtl.bz/2qJigRT
• Glass Lewis’ Shareholder Initiative Guidelines https://corpgov.law.harvard.edu/2018/11/09/glass-lewis-shareholder-initiative-guidelines/

• Emerging Practice in Long-Term Plans https://corpgov.law.harvard.edu/2018/11/09/emerging-practice-in-long-term-plans/

Investing

• Alpha within Factors https://osam.com/Commentary/alpha-within-factors “At OSAM, we measure valuation using a composite index that takes inputs from the P/E ratio, the enterprise-value-to-ebitda ratio, the enterprise-value-to-free-cash-flow ratio and the price-to-sales ratio. In testing, we’ve found that this approach generates excess returns that are smoother and more consistent than the metrics in isolation.“
• The Radical Saving (aka, FIRE) Trend Is Based on Fantasy https://trtl.bz/2FtHWwr
• Quants Are Facing a Crisis of Confidence https://trtl.bz/2qEAu74

• Buffett’s Underrated Investment Attribute http://basehitinvesting.com/buffetts-underrated-investment-attribute/

Quantitative

• Introduction to quantitative finance part I: Stylized facts of asset returns https://trtl.bz/2qxPHae
• Flirting — An Exercise in Bayesian Statistics https://trtl.bz/2qDAQLw
• Linear Regression in Real Life https://www.dataquest.io/blog/linear-regression-in-real-life/

• Two Ways You Can Use Small Sample Sizes to Measure Anything https://trtl.bz/2qFLJMR
• The McRib Effect (Why Understanding Causality is So Difficult) https://ofdollarsanddata.com/the-mcrib-effect/
• Principal Component Analysis: Your Tutorial and Code https://trtl.bz/2FexXeg

Career

• 8 Timeless Skills to Learn Now in Under 8 Hours to Change your Life Forever https://trtl.bz/2qHgZLb
• The Math Behind The 5-Hour Rule: Why You Need To Learn 1 Hour Per Day Just To Stay Relevant   https://trtl.bz/2qEz0tw

• Want to Become a Data Engineer? Here’s a Comprehensive List of Resources to get Started   https://trtl.bz/2qIkn8K
• Wall Street Analysts Are Now Selling More Data, Less Analysis (wsj.com) https://trtl.bz/2qIflsU

Other

• The Longevity Opportunity https://hbr.org/2018/11/the-longevity-opportunity
• Origins and Challenges of a Strong Dollar http://econbrowser.com/archives/2018/11/origins-and-challenges-of-a-strong-dollar