How to correlate between the GARP material and Video here.

Discussion in 'P1.T1. Foundations of Risk (20%)' started by shubz2012, Jun 18, 2012.

  1. shubz2012

    shubz2012 New Member

    I am new member.
    I went through the material provided by GARP for Foundation of Risk mgmt. - chapter 1
    but could not correlate it with the video on the same topic.
    I could not see much maths involved in first 2 chapters whereas the video shows the quantitative side(which makes sense).
    Is it a good idea to first go thru the video then the material as provided by GARP ?
    Pls Advice.

  2. Ankur S

    Ankur S Member

    Hi Shubhajit,

    I like the idea of going though the video first to know what i am learning in a new chapter and once the video finishes, then you could read the garp core reading, BT notes, practice questions. Video is a concise and quick way to cover topics initially.

    Hope this helps.
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  3. Suzanne Evans

    Suzanne Evans Administrator

    Hi Shibhajit,

    I would highly recommend the videos by David. We most definitely get positive feedback on those as David reviews every individual AIM.

    Do you need the readings? See here:

    You might find Aleksander 's input helpful here:
    Should you have any additional questions or concerns, please do not hesitate to ask.

    Good luck!

  4. tkvfrm

    tkvfrm New Member Subscriber

    Hi Dave,

    Reference: P1.T1 Amenc-Chapter 4 (questions 26 to 32)

    My question is on 31.4 D. This is my understanding on Jensen's alpha --. Excess return (9%) less CAPM.
    CAPM: Risk Free plus ((exp return from market less risk free return) * beta))
    Risk free is 3.0 % exp return from mkt is 5% and beta is 0.8 . In the answers why is that 0.8 is multiplied by 5%? I do not see the CAPM equation here. Am I missing something here?
  5. David Harper CFA FRM

    David Harper CFA FRM David Harper CFA FRM (test) Staff Member

    Hi thanala,

    An "excess return" refers to excess over this riskfree; Grinold always uses excess returns, other do not. Best is to be comfortable with both.

    This question (31.4) asks, emphasis mine, "Assume the riskfree rate is 3.0% and the price of risk (excess market return) is 5.0%. A manager's portfolio produces a return of 9.0% with 30% volatility and a CAPM beta of 0.8 (i.e., quantity of risk = 0.8). What is the (ex post or realized) Sharpe ratio?" (actual question below @

    The means the market's return = 8% or, equivalently, the market's excess return (aka, price of risk) = 8 - 3% = 5%. So that:
    • Expected portfolio return per CAPM, if beta = 0.8 is given by: Rf + beta(E[M] - Rf) = 3% + 0.8*5% = 7%
    • Jensen's alpha = Portfolio - E[per CAPM] = 9% - 7% = 2%
      The answer given is doing this (is using CAPM),
      Answer given is 9% - (0.8 *5%) - 3% = 2%
      i.e., 9% portfolio - [Rf + beta*ERP]; ERP = equity risk premium or excess market return
    • But we can also just deal in "excess returns," which turns out to be convenient in multi-factor models: if portfolio excess returns = 6%, then alpha = 6% - (beta*ERP) = 6% - (0.8*5%) = 2%.
    I hope that explains, thanks
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  6. tkvfrm

    tkvfrm New Member Subscriber

    Yes. Thank you.
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