Hi David, I am struggling to understand some concepts of ch 6.
- Please explain why in the formula of σp (portfolio standard deviation) you ignore the weight factor. It is known that the formula is (w1*σ1)^2+(w2*σ2)^2+2w1*w2*σ1*σ2*ρ. However, when you solve it you probably set w1=w2=w3=1, despite the fact that w1+w2+w3=1. I am referring to the example at page 25.
- Please clarify me what is the correct formula for the standard deviaton of percentage loss, expressed as a percentage of the size of the portfolio. At page 16 you say it is σ(%L)=σ^2/(n*L). In the Garp book it is stated that the formula is σ(%L)=σ/(n*L). What is the correct approach?
- Please clarify me something regarding copulas and Vasicek Model. At page 20 it is stated that Ui=α*F+sqrt(1-α^2)*Zi is the sum of two SND with μ=0 ανδ VAR= 1. However at page 88 at GARP book it is stated that the distribution of each Ui has μ=aF and σ=sqrt(1-a^2). My question is: at least Ui has a ND or a SND?