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Week in Financial Education (May 10, 2021)

Welcome to the latest week in financial education (WIFE)! As the May exams have started, we experienced another busy week. We are grateful for some fabulous contributions by members (see links below). At this time of year, many candidates are naturally focused on practice question revision, not just from our database but also from other sources like GARP’s Practice Exams. This always elicits informative feedback on the issue of question quality. We are constantly reminded that Imprecise or poorly worded questions prove to be debatable (or at least confusing) when they are stress tested. In the worst case, a flawed question can actually reinforce a mental mistake. GARP’s question about a repo transaction (link below) is a fine example. This is a question that GARP had already revised twice in 2016-17 due to imprecisions but even their updated version could be improved. My strong belief is that a good question should not make the candidate struggle to interpret any input assumption (e.g., is the given bond price a quote price or an invoice price?); given limited time, it is hard enough to perform the calculation required by the question.

I hope you like this week’s new practice questions. The new correlations (Chapter 12) set should give you good coverage on some useful techniques: The Jarque-Bera test of normality, the power law for heavy-tail distributions, and a low-difficulty quiz asking you to find rank (Spearman’s and Kendall’s tau) correlations. The latter (rank correlations) is also a concept in Topic 5 (Part 2, Market Risk) where we had the pleasure of contributing an edit to FRM author Gunter Meissner’s book (see for details). If you happen to be a visual thinker like me, here is how I handle concordant/discordant pairs, it’s simple: concordant pairs lie in the first (I) or third (III) quadrant About the portfolio construction question set, I calibrated them as approachable; as we’ve often observed, the weakness of this reading assignment (Grinold Chapter 14) is the lack of scaffolding: the material presumes you’ve read prior chapters in the book. Have a good study week!

New Practice Questions

1. P1.T2.21.4. Non-normal distributions and rank correlations

Daily returns of crypto currencies model

2. P2.T9.21.4 Portfolio construction: neutralized alphas and dispersion

Forum News

1. [P1.T2] Generalized student’s t versus student’s t

2. [P1.T3] Thank you to librosdeholanda for noticing our question should refer to a trading strategy profit rather than payoff

3. [P1.T3] Thank you lushukai for helpful swap pricing observations

4. [P1.T3] Thank you shuffleshoe for correcting an imprecision in our strap ROI question

5. [P1.T4] Jagan.Ganti with a great observation that forward spreads aren’t exactly equal to spot spreads

forum response

6. [P1.T4] Which makes more efficient use of data, parametric VaR or historical simulation (HS) VaR?

7. [P1.T5] A common issue encountered when using the normal approximation of the binomial VaR backtest: CLT or not? and a similar application here

8. [P2.T8] The unfair cognitive load of an imprecise repo question and its antecedent from the 2020 Part 2 Practice Exam

9. [P2.T9] sohinichowdhury offers a more elegant M^2 formula

10. [P2.T9] What is a realistically high/low R^2 in empirical finance?

11. [P2.T9] Thank you @badbunny for calculator assistance

forum response

Curated Links (items you might like)

1. 2021 The State of Risk Oversight: ERM Practices – 12th Edition Comments by Norman Marks

Formal report of top risk exposures to board annually and percentage of organizations formally reporting top risk exposures graphs

2. Risk Appetite and Risk Tolerance (Which definitions do you use?) by Carol Williams

3. GARP Intelligence: High-Frequency Trading: A Sociologist’s Take and What’s Next? A Guide to Managing Inflation Risk

4. Protiviti’s 2021 Next-Generation Internal Audit Survey (report here)

Claim analysis model

5. G20 TechSprint 2021 Site is here

6. Sea level rise uncertainties: Why all eyes are on Antarctica

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