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# FRM Level 2 , Nov 2012 : Post what you remember here

#### HopeToPassLvl2

##### New Member
Allied Irish Bank - John Rusnak - 2 options were very close - Inexperienced Manager/Inexp control ppl.

I chose 2nd because qstn asked wat led him to hide his fake Transactions. Inexperience of Manager will be too broad a reason in this context.

Managing tail risk: I remember the option as "POSITIVELY" correlated with tail risk and not Negatively .. did i read it wrong ? .. I chose 'Invest in US Treasury'
I felt that there's no such thing as negative correl to tail risk. Since tail risk cannot be diversified away, correlation does not matter. I answered the put (i might be mistaken tho this might have said call. If that's the case, im wrong) options as a hedge to tail risk.

#### HopeToPassLvl2

##### New Member
You are absolutely right! but still the answer is debatable because neither ES or Standard deviation are totally right answers...
I think VaR is the answer here. Let's not overanalyze the question. It clearly says a coherent risk measure and easy to understand. I read in schweser that ES is not easy to understand, but VaR is. And also, even if VaR is only a coherent risk measure for normal dist, it is still a coherent risk measure. That's why the answer is VaR.

#### klartxt

##### New Member
Responding to the tail risk question:
i'm pretty sure that the answer was invest in Treasuries. Here's why:
1) the choice with the put was short put, if i recall correctly. That would increase tail risk.
2) i remember a practice question where the investor shorted Treasuries to reduce tail risk and the question was whether she did the right thing - and the answer was: No, she should have gone long Treasuries. The short position increases the risk bc in crisis there is typically a flight to quality, so a long position would profit from increasing TR prices during crisis.

#### HopeToPassLvl2

##### New Member
I would say max(liq dur stock a, liq dur stock b) rather than min(liq dur stock a, liq dur stock b).
Oh yeah. Did not notice that.

#### HopeToPassLvl2

##### New Member
i'm pretty sure that the answer was invest in Treasuries. Here's why:
1) the choice with the put was short put, if i recall correctly. That would increase tail risk.
2) i remember a practice question where the investor shorted Treasuries to reduce tail risk and the question was whether she did the right thing - and the answer was: No, she should have gone long Treasuries. The short position increases the risk bc in crisis there is typically a flight to quality, so a long position would profit from increasing TR prices during crisis.
If it said short put. I am wrong here then.

#### klartxt

##### New Member
I think VaR is the answer here. Let's not overanalyze the question. It clearly says a coherent risk measure and easy to understand. I read in schweser that ES is not easy to understand, but VaR is. And also, even if VaR is only a coherent risk measure for normal dist, it is still a coherent risk measure. That's why the answer is VaR.
But then standard deviation would also be a coherent and easy to understand risk measure. It's not as clear cut as put here.

#### deaf rodent

##### New Member
It was 9 days because the formula goes: min(liq dur stock a, liq dur stock b).

I think you added their liquidity durations that's why you arrived at 12 days.
Yip...I did that. Ok makes total sense...didn't think about that in the exam

#### varun34by02

##### Member
As far as I remember the question was about coherence risk measure that is easy to interpret and definitely standard deviation is a wrong answer as it does not fulfill the axiom of translation invariance.
Spectral is way too complex
ES is coherent but it "MAY" be stable at times. - Best possible option !

#### varun34by02

##### Member
I think VaR is the answer here. Let's not overanalyze the question. It clearly says a coherent risk measure and easy to understand. I read in schweser that ES is not easy to understand, but VaR is. And also, even if VaR is only a coherent risk measure for normal dist, it is still a coherent risk measure. That's why the answer is VaR.
VaR is not sub additive.. it fails 1/4 coherent risk measure attributes.

#### varun34by02

##### Member
Yip...I did that. Ok makes total sense...didn't think about that in the exam
The same question was a part of May L2 Exam.. Over there I saw finally agreed answer as Weighted average..Something like $180 and$200 as weights resp...So I used the same here... If I can vaguely recollect, Igot about 8.8. and chose 9

#### sleepybird

##### Active Member
This was a tricky question. The liability>asset choice was a trap for those who didn't pay close attention (almost got me). I chose subordination as the answer because, if I remember correctly, the reading says Overcollateralization is often created through subordination, but I could be wrong.

True. There was one option which states Value of MBS issued > value of underlying mortgage pool which is the opposite of the collateralization. Regarding the asset and liabilities concept, let me explain clearly. From a financial perspective, anything which generates revenue over a future period of time (in other words, provide economic benefits over the future) is an asset and the one which creates expenses over a period of time is a liability. So if a bank extends a loan to its customer, it is an asset for the bank as it will generate interest income over the future period. Similarly If it has taken a loan from other banks or central bank, then it is a liability for a bank since it has to pay interest in the future period. SPV is a separate entity and it has its own balance sheet. For a SPV, underlying mortgage pool is an asset coz it will generate income in the future and MBS or pass through securities is a liability. Your statement is correct. If assets are greater than liabilities, its a way of overcollateralizing. But in this case, underlying mortgage pool is an asset and liability is MBS/Pass-through securities. Hope I made it clear.

#### sleepybird

##### Active Member
Standard deviation is not coherent because it fails monotonocity. I agree this was a tricky/flawed question.
ES is not easy to interpret...it is clearly mentioned in Schweser...I put Standard deviation instead! it's confusing...

##### Member
I wish GARP would read this trail of feedbacks to see how confused we are about the answers. This is a evidence of how tricky the exam was...I hope at the end that everyone will pass!

#### sleepybird

##### Active Member
Agreed and that's what I said in my earlier thread also. It forces me to decide which is more important? Being coherent or easy to understand? I chose coherent over easy to understand (ie I chose ES), but nobody knows the GARP answer.
Standard deviation is not coherent because it fails monotonocity. I agree this was a tricky/flawed question.

#### roierez@gmail.com

##### New Member
Does anyone remember the questions with the two MBS (1 year and 2 year), 2 yield curves and the question regarding nominal and z-spread?

I noticed yield curve 2 was much steeper for 2 years hence thought the difference between z spread and nominal spread would be most pronounced given MBS 2 and yield curve 2 (I believe)

#### matmet

##### New Member
Agreed and that's what I said in my earlier thread also. It forces me to decide which is more important? Being coherent or easy to understand? I chose coherent over easy to understand (ie I chose ES), but nobody knows the GARP answer.
Can anyone confirm that in the original reading (Dowd?) ES is characterized as being not easy to understand?

Maybe it was just a interpretation of the Schweser guys..

#### klartxt

##### New Member
same thing for the question about adding asset A or asset B to a portfolio:
- asset B had the higher Sharpe Ratio, but choice given was "Add A because higher Sharpe Ratio". Not correct.
- the asset with the higher info ratio was not the one they offered for adding it to the portfolio. Also not correct.
- the two choices left were equally "correct", but you weren't left with any good clue whether you should add A for its higher "excess" return or B for its lower volatility. Both possible.

The only thoughts I had was that it had to be Asset B (choice d) for the lower volatility, because you couldn't really calculate excess return since the benchmarks return was given as "last year: 7%" and the expected returns in the table for assets A and B were for a different period, namely next year, as "expected returns"

No one?