Week in Financial Education (June 21, 2021)
Welcome to the latest WIFE. For Part 1, we have a new practice question (PQ) set for the insurance chapter (FMP-2). I have a question about the combined ratio after dividends (CRAD). This CRAD measure is interesting because some sources subtract the dividend, CRAD = CR – D, while others (like GARP) add per CRAD = CR + D. Adding the dividend seems more logical to me and is corroborated by the Triple-I. For the new dollar/time-weighted return PQ, I think I wrote my best question so far: it extends to three periods and provides the holding period returns (HPR) so the user can focus on the essential calculation (rather than the tedious HPR and net cash flows). A warning: these dollar/time-weighted returns tend to elicit questions about the timing of the dividends! In regard to the curated links, the #rstats time series introduction is simply excellent. And I discovered a new source: https://future.a16z.com/ features an amazing cast of authors (e.g., stripe founder Patrick Collison). I’ve included an update from their Scott Kupor (MP at a16Z and author) on Direct Listings (which is a concept in the FRM.P1.FMP-1). Have a good study week!
New Practice Questions
1. P1.T3.21.4. Ratios for Property-Casualty (P&C) Insurance Companies https://trtl.bz/35G4apc
W21.4.3 Acme is a large, diversified insurance company with a AA+ rating and a complex capital structure owing to its size. This year Acme will issue two debt instrument. One is regular corporate bond that pays a 6.0% per annum coupon. The other is a CAT (catastrophe) bond triggered by Florida hurricane event(s). Given Acme's strong credit rating and financial cushion. the probability of a hurricane event is significantly greater than Acme's default probability. Of course, a CAT bond has unique features that suggest the motivations, for the issuer (aka Acme) and its investors, will differ from the motivations related to a regular bond. In regard to these motivators and the advantages/disadvantages of a CAT bond. which of the following statements is TRUE?
- To the issuer (Acme), an advantage of the CAT bond is that is can be offered a lower yield (i.e., cost of capital) than Acme's regular bond
- To the issuer (Acme), a disadvantage of the CAT bond is the counterparty (risk) exposure to the investors who might default in the event the CAT bond is triggered.
- To the investors, an advantage of the CAT bond is that yield will be higher will probably be higher than Acme's regular bond
- To the investors, a disadvantage of the CAT bond is that its high idiosyncratic risk (aka, specific risk) will confer poor diversification benefits.
2. P2.T9.21.10. Time- versus dollar-weighted returns and risk-adjusted measures https://trtl.bz/3wKE0NJ
1. [P1.T1] Relative versus absolute VaR is a fundamental distinction https://trtl.bz/3qeSO4F
2. [P1.T1] How many years of alpha are needed for significance (skill)? https://trtl.bz/35BNbV1
3. [P1.T3] Impact of correlation between interest rate and spot price on the futures price https://trtl.bz/3gMuuD3
4. [P1.T4] Price change as bond matures (coupon versus forward rate) https://trtl.bz/3qaVsIZ
5. [P1.T4] Solution to prior exam’s VaR and ES question https://trtl.bz/3cVTA1d
6. [P1.T4] Plot of full-versus-flat bond price over time https://trtl.bz/2TRB6bj
7. [P2.T6] Can bilateral CVA adjustment artificially inflate the value of an asset? https://trtl.bz/3gI7ncO
8. [personal] Advisability of mortgage refinance https://trtl.bz/3wLd6VU
Curated Links (items you might like)
1. RISK, REGULATION, AND BANKING
- [GARP] When Developing a Risk Appetite, Don’t Forget Untreatable Risks https://trtl.bz/3iRVSlT
- [GARP] Swans, Rhinos and Elephants Are Animating Risk Debates https://trtl.bz/3zCLQee
- The Biggest Business Risks in 2021 https://trtl.bz/3qbTFDn
- Prove your value to the CEO: Focus more on big picture issues, less on process (Carol Williams) https://trtl.bz/3gLEIU7
- In conversation: Managing in extreme uncertainty https://trtl.bz/3qhm6zJ “This requires accepting that in extreme uncertainty, there is no such thing as a forecast; there are only scenarios.”
- Ransomware claims are roiling an entire segment of the insurance industry https://trtl.bz/2TNivxo
- The Promises and Pitfalls of the SFDR https://trtl.bz/3qaMGdY
2. DATA, TECH, CYBER AND DEFIBANKING
- [GARP] How to Mine Synthetic Data: Pros and Cons of a Shiny New Tool for Risk Managers https://trtl.bz/2SNEx2L
- Decentralized Finance: What It Is, Why It Matters (a16z) https://trtl.bz/3gNwyw1
- DeFi Protocol Risks: the Paradox of DeFi (SSRN) https://trtl.bz/3gQUfSP
- Zero Knowledge https://www.notboring.co/p/zero-knowledge ZKPs were reviewed in FRM’s 2020 P2.T10 reading (Impact of Blockchain Technology in Finance)
3. MATH & CODE
- Time Series Introduction with R codes https://trtl.bz/35Fp5ss
- Estimating a risk difference (and confidence intervals) using logistic regression https://trtl.bz/3wL6Ygq
- Yield to Maturity and Reinvestment Risk https://trtl.bz/3gJlIqQ
4. INVESTING & FINANCE
- The r/WallStreetBets Glossary: A field guide to apes, stonks, tendies, and more https://trtl.bz/2TTzLkE
- A Quick Pulse Check on Direct Listings (a16z) https://trtl.bz/35C8UvZ
- Has Uncovered Interest Parity been resolved? (Tyler Cowen) https://trtl.bz/2SbSdUS
- Predicting Inflation is Hard (Ben Carlson) https://trtl.bz/3vJgrnk
- In Online Ed, Content Is No Longer King—Cohorts Are (a16z) https://trtl.bz/3gLWV4b
- America’s pandemic of unemployment fraud https://trtl.bz/2TNinOq
- Risk Forward: Embrace the Unknown and Unlock Your Hidden Genius (5 Insights from NBIC) https://trtl.bz/3wJj8GK
- An Introduction to Prediction Markets https://trtl.bz/3wILW2f
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