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FRM MAY PART 1 2013 Feedback

over

New Member
re question about chosing to either create an internal ratings system or go with agencies, the logical choices seemed to be either: a bond rated investment grade at the beginning of the year is unlikely to default or ratings in the depths of the business cycle have less quality. Still unsure as to the best answer.
 

Spronkworks

New Member
re question about chosing to either create an internal ratings system or go with agencies, the logical choices seemed to be either: a bond rated investment grade at the beginning of the year is unlikely to default or ratings in the depths of the business cycle have less quality. Still unsure as to the best answer.

I can't be sure either, and those were the two best choices, but here is what I think: the "depths of business cycle" sounded too much like a trap for anyone forgetting that ratings are "through the cycle". That is, if "less quality" means lower ratings then no, the rating agencies do not give lower quality ratings due to the business cycle. On the other hand, it is a matter of historical record that very few companies go from investment grade to default within a year. While that may not have been the case for some subprime and other weak structured deals in 2007-08-09, I interpreted the question as referring to corporate debt... don't know if that helps.
 

Spronkworks

New Member
I think we did not have the same graph as given. There were three points to the left of the curve connecting mid a and mid c. Portfolio d was also on the left of said curve. it was situated in between but a bit below a and b.

With no certainty of being correct, of course, I chose B for the following reason: If I recall, the components were 3 indexes composed of large-cap, mid-cap and small-cap stocks. As could be observed from the 2-way efficient frontier lines (and is a reasonable approximation of real-world behavior), the mid-cap offered the least diversification relative to the large-cap / small-cap efficient frontier. Thus, doing a 3-way portfolio would, IMO, converge to the large-cap / small-cap line at each extreme, and would rise modestly above it in the middle... and would not, as required by some of the options, bulge high and to the left. B was the only option that was above the 2-way lines and also fell on a smooth, slightly convex curve that converged to the large-cap / small-cap line at high and low returns.
 

over

New Member
I can't be sure either, and those were the two best choices, but here is what I think: the "depths of business cycle" sounded too much like a trap for anyone forgetting that ratings are "through the cycle". That is, if "less quality" means lower ratings then no, the rating agencies do not give lower quality ratings due to the business cycle. On the other hand, it is a matter of historical record that very few companies go from investment grade to default within a year. While that may not have been the case for some subprime and other weak structured deals in 2007-08-09, I interpreted the question as referring to corporate debt... don't know if that helps.
 

over

New Member
I think you are correct. The question referred to corporate rather than structured and for corporates indeed very few default from investment grade within one year. What threw me was "very few" given how statistically orientated the exam is plus they were trying to decide between a raing agency and internal ratings so not sure how the very few default within one year really helps them
 

Spronkworks

New Member
I think you are correct. The question referred to corporate rather than structured and for corporates indeed very few default from investment grade within one year. What threw me was "very few" given how statistically orientated the exam is plus they were trying to decide between a raing agency and internal ratings so not sure how the very few default within one year really helps them

I hear you... I only answered as I did through process of elimination, thus not possible to be completely confident in the answer
 

noalv4

Member

Thanks,
Do you remember also the following:
1. Expected return (CAPM)?
2. There was also a graph with vol. Don't remember quite well the question... posibilities where 0.5 0.75 and more...
3. Is the MC VaR is lower than the one with the delta?
 

noalv4

Member
Regarding the question about over hedge with Futures...

Does someone remembee what was the other possobolities in the answer beside "decreasing of SPOT volatility"?
Does there was "Higher volatolity of the FUTURE?

Thanks.
 
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