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Information ratio

The information ratio is active (or residual) return divided by active (or residual) risk. Active risk is also called tracking error, so the "active information ratio" is given by (active return)/(tracking error). Alternatively, a more technical approach is to use alpha (aka, residual risk) so that the "residual information ratio" is given by alpha/(residual risk).

Derivative Payoff/Profit Diagrams Introduced (FRM T3-1)

Payoff is the future cash flow. For a long option, profit = payoff - initial premium (aka, cost). For a short option position, profit = premium - payoff. Here is an interesting difference between the call and the put: the call's payoff/profit is theoretically uncapped, but the payoff of the put is capped at the exercise price (because the future stock price cannot drop below zero!).

Risk-neutral probabilities (FRM T5-07)

One of the harder ideas in fixed income is risk-neutral probabilities. In this video, I'd like to specifically illustrate, and define, what we mean by risk-neutral probabilities.

Properties of Stock Options SAMPLE

  • Identify the six factors that affect an option’s price and discuss how these six factors affect the price for both European and American options

  • Identify and compute upper and lower bounds for option prices on non-dividend and dividend paying stocks.

  • and more..

Applying Duration, Convexity, and DV01

  • Describe an interest rate factor and name common examples of interest rate factors.

  • Define and compute the DV01 of a fixed income security given a change in yield and the resulting change in price.

  • and more....

Jorion, Chapter 6: Backtesting VaR

  • Define backtesting and exceptions and explain the importance of backtesting VaR models.

  • Explain the significant difficulties in backtesting a VaR model.

  • Verify a model based on exceptions or failure rates.

  • and more....

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