Week in Financial Education (April 5, 2021)
This week we had a interesting question about the definition of duration due to an apparent difference between GARP®’s new material and Tuckman. It’s a good chance to understand the math that underlies this fundamental bond risk measure. In external news, Archegos is a dominant story (and likely future FRM® case study). Finally, David mentions the latest trade in his equities portfolio: he purchased an initial position in Coursera ($COUR).
In the forum (beginners/new learners)
- Whose definition of DV01 is correct, Tuckman or GARP? https://www.bionicturtle.com/forum/threads/dv01-definition-clarification-needed-extreme-mental-emergency.23751/
- Which sample skew should be used? (answer: either) https://www.bionicturtle.com/forum/threads/gujarati-skewness-kurtois-calc-formula-clalrification.1284/post-87860
- Which sample variance is incorrect? (answer: neither) https://www.bionicturtle.com/forum/threads/p1-t2-20-11-sample-moments-and-bias.23372/#post-87868
- GARP’s Portfolio VaR Q&A (2017.P2.09) still has an error after we gave them a fix https://www.bionicturtle.com/forum/threads/garp-practice-exam-2017-q9-part-ii.23756/
- Thank you [USER=61806]@lushukai[/USER] for help explaining conditional independence https://www.bionicturtle.com/forum/threads/conditional-indepedence.23742/post-87831
- Covariance(i, P) is self-referencing and it is good practice to apply basic covariance properties https://www.bionicturtle.com/forum/threads/t9-r63-p2-describe-the-challenges-associated-with-var-measurement-as-portfolio-size-increases.23753/
- If the lease rate L = r – 1/T * LN(F/S), then it must again be the case that L = y-u per [USER=61806]@lushukai[/USER] ‘s continuing mastery of lease rate https://www.bionicturtle.com/forum/threads/l1-t3-188-commodity-futures-curves-gold-corn-gas-oil-mcdonald.4663/post-87862
- Wrong-way risk is adverse correlation between credit exposure and counterparty credit quality but doesn’t need to manifest in both directions https://www.bionicturtle.com/forum/threads/p2-t6-405-stulz-on-the-credit-risk-of-derivatives.7689/page-2#post-87856
- What is the classical difference between a credit default swap (CDS) and a credit-linked note (CLN)?https://www.bionicturtle.com/forum/threads/understanding-credit-linked-notes.5779/post-87836
In the forum (practitioners or experienced candidates)
- When can a portfolio have a higher Sharpe or Treynor than the Market Portfolio? https://www.bionicturtle.com/forum/threads/p1-t1-20-8-modern-portfolio-theory-mpt.23118/post-87872 and further elaboration on the non-superficial difference between the CML and the SML https://www.bionicturtle.com/forum/threads/mean-variance-analysis.23736/post-87848
- Normal backwardation follows from investor risk aversion https://www.bionicturtle.com/forum/threads/l1-t3-186-futures-curves-and-spot-futures-equilibrium-gemen-mcdonald.4648/post-87859
- The iid assumption in extreme value theory (EVT) https://www.bionicturtle.com/forum/threads/l2-t5-90-multivariate-evt-dowd.3866/post-87841
- Archegos: He Built a $10 Billion Investment Firm. It Fell Apart in Days This is surely a future FRM case study featuring total return swaps (TRS, aka TROR). Karen Maley says there are three lessons: prime brokerage is risky; liquidity can evaporate quickly (note she refers to what Dowd calls endogenous asset liquidity); and fire sales favor an early exit. Matt Levine is more direct, “The incredible thing about Bill Hwang is that he made enormous levered bets on risky stocks, and those bets worked out perfectly and made him immensely wealthy in the course of a year or two, and he seems to have plowed every cent of it back into increasing those levered bets.”
- The Two Schools of Probability Theory https://www.cantorsparadise.com/the-two-schools-of-probability-theory-76d0c0c8198d
- Evaluation of the effects of too-big-to-fail reforms: Final Report by Financial Stability Board (FSB) https://www.fsb.org/2021/03/evaluation-of-the-effects-of-too-big-to-fail-reforms-final-report/
- Marsh 2021 Global Technology Industry Risk Study https://www.marsh.com/us/insights/research/tech-risk-study.html (report)
- A strategic vision for model risk management (McKinsey) https://www.mckinsey.com/business-functions/risk/our-insights/a-strategic-vision-for-model-risk-management
- The Suez Canal blockage – lessons to be learned (Allianz) https://www.agcs.allianz.com/news-and-insights/expert-risk-articles/suez-canal-lessons-learned.html
- GARP’s Risk Intelligence published some good articles: OpRisk Capital Chess (Banks Lose First Match) by Peter Hughes https://trtl.bz/3mhXlS8; For CLOs a Bumpy Path Away from Libor by John Hintze https://trtl.bz/3cSgRl0; and 5 Post-Pandemic Lessons for Risk Managers by Cristian deRitis https://trtl.bz/3sTBFOz
- Basel Committee issues Principles for Operational Resilience and risk https://www.bis.org/press/p210331a.htm
- Signpost Analysis by Carol Williams (ERM expert)
- Second edition of The Data Journalism Handbook (free pdf) https://flowingdata.com/2021/03/26/the-data-journalism-handbook/
- The Factor Zoo: Some Thoughts On ‘Is There A Replication Crisis In Finance?’ https://seekingalpha.com/article/4417419-factor-zoo-thoughts-on-is-replication-crisis-in-finance
- Yuval Noah Harari: Lessons from a year of Covid https://www.ft.com/content/f1b30f2c-84aa-4595-84f2-7816796d6841
- Risk Less Make More https://humbledollar.com/2021/04/risk-less-make-more/ Good list. Knowledge is dangerous (#5). The difference between amateur investors and the pros is that the pros think more about risk (#6).
Coursera ($COUR) went public last week (their S-1 is here). I bought a small, initial position without regard to valuation, simply as motivation to stay informed on the company. I also participate indirectly via a long position in SuRo Capital ($SSSS at https://investors.surocap.com/) which is a public BDC that has positions in Coursera, Nextdoor, Course Hero and Palantir; $SSSS OpEx is too high, but I’m attracted to their concentrated portfolio. One fellow SA investor (at Louis Steven’s excellent service–Beating he Market–which is ranked #1 in a very competitive marketplace) argues that Coursera pairs well with 2U (https://2u.com/); so I’m adding TWOU to my watchlist. Last year I switched over to Coursera Plus, their subscription service (https://www.coursera.org/courseraplus).
To work in EdTech is also to admire Coursera as an observer and a customer (does CeriFi compete with Coursera? As far as I can tell, not yet directly). At current market capitalization of almost $5.9 billion and TTM sales of almost $300 million, the trailing P/S is almost 20x. Although that’s a historically high multiple, I consider last week’s $50.00 price to offer a durable long-term margin of safety: given its massive TAM and moatish competitive advantages, I’d expect COUR to eventually breach $50.0 billion in market cap company (albeit at perhaps slower growth rates than are often expected by SaaS investors and their kinetically aggressive screens). Their consumer flywheel is formidable and their brand is excellent. This is a stock we can hold without worrying about interim volatility. Their flywheel includes active innovation on their sophisticated skills graph (77 million learners and >200 university partners); see their Skills Development Dashboard. In just the last 12 months, recent innovations include Career Learning Paths, Academies (for business customers) and Professional Certificates from Google (e.g., Data Analytics, Project Management, US Design). I will share much more in a future investment thesis write-up on $COUR.
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Passed! 1,4,1,2,1,4! Thank you David and Nicole for your efforts! Thank you BT! Couldn't have done it otherwise. I'm a mechanical engineer who had a career in petroleum services, then I decided to switch career to financial risk management. Passed part 1 from the first time with top quartiles and passed part 2 from the first time as well. All with BT! BT is always the recommendation I give to people aiming at the FRM designation! Thank you again!
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