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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 https://trtl.bz/2rseaBT 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 https://trtl.bz/3y76ans. 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 http://trtl.bz/BT-P2-T2-21-4-Non_normal

2. P2.T9.21.4 Portfolio construction: neutralized alphas and dispersion http://trtl.bz/P2-T9-21-4-Portfolio_alpha

Forum News

1. [P1.T2] Generalized student’s t versus student’s t https://trtl.bz/3f0VE8m

2. [P1.T3] Thank you to librosdeholanda for noticing our question should refer to a trading strategy profit rather than payoff https://trtl.bz/3nYzXde

3. [P1.T3] Thank you lushukai for helpful swap pricing observations https://trtl.bz/33r0YfQ

4. [P1.T3] Thank you shuffleshoe for correcting an imprecision in our strap ROI question https://trtl.bz/3vUpMt2

5. [P1.T4] Jagan.Ganti with a great observation that forward spreads aren’t exactly equal to spot spreads https://trtl.bz/3eCgyff

6. [P1.T4] Which makes more efficient use of data, parametric VaR or historical simulation (HS) VaR? https://trtl.bz/3uA9dSH

7. [P1.T5] A common issue encountered when using the normal approximation of the binomial VaR backtest: CLT or not? https://trtl.bz/2RFl9E4 and a similar application here https://trtl.bz/3hc8seT

8. [P2.T8] The unfair cognitive load of an imprecise repo question https://www.bionicturtle.com/forum/threads/garp-2021-pre-study-pack-q2-repo.23813/ and its antecedent from the 2020 Part 2 Practice Exam https://www.bionicturtle.com/forum/threads/garp-2020-practice-exam-part-2-q74.23268/

9. [P2.T9] sohinichowdhury offers a more elegant M^2 formula https://trtl.bz/3hekmF1

10. [P2.T9] What is a realistically high/low R^2 in empirical finance? https://trtl.bz/33wYH2R

11. [P2.T9] Thank you @badbunny for calculator assistance https://trtl.bz/3ybTgEG

Curated Links (items you might like)

1. 2021 The State of Risk Oversight: ERM Practices – 12th Edition https://trtl.bz/3uEFfNt Comments by Norman Marks https://trtl.bz/3o7wFVc

2. Risk Appetite and Risk Tolerance (Which definitions do you use?) by Carol Williams https://www.erminsightsbycarol.com/risk-appetite-tolerance-definitions/

3. GARP Intelligence: High-Frequency Trading: A Sociologist’s Take https://trtl.bz/3f4INlK and What’s Next? A Guide to Managing Inflation Risk https://trtl.bz/3vSAujy

4. Protiviti’s 2021 Next-Generation Internal Audit Survey https://trtl.bz/3eA3xmk (report here)

5. G20 TechSprint 2021 https://www.bis.org/hub/2021_g20_techsprint.htm Site is here https://www.techsprint2021.it/

6. Sea level rise uncertainties: Why all eyes are on Antarctica https://trtl.bz/3xTWufI

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I took the exam in Sydney and had a similar feeling about the exam being more qualitative (but no less rigorous). However, I felt I was better prepared thanks to the BT's relentless focus on throwing real life examples and methods.

Jagan G.

I subscribed to BT for my Part 1 FRM exam and just wanted to say thanks for the depth and breadth of the study materials and practice questions. I found out that I scored in the top quartile of every topic and I absolutely could not have done this without using BT - I spent many, many hours going over the practice questions and answers! I wanted to express my appreciation and gratitude to your team for your hard work in creating these materials. Thanks!

Shu C.

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Ivan J.

Passed first time. Happy all the hard work paid off. BT was the right choice. Thanks David and Nicole for your work and commitment.

John D.

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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John D.