Welcome to another Week in Financial Education! This week saw some great questions and fascinating insights. I will just highlight the instructive example of a flawed solution in the 2021 practice paper (as usual, the impetus is candidates’ justifiable confusion). This one is tricky because the correct answer is coincident with two implicit assumptions, but the approach will break under other conditions! One thing we’ve always cared about here (at Bionic Turtle) is mastery of the fundamentals. We don’t just want you to pass the exam. We want you to take away a robust toolkit. Part of that toolkit is fluency in the fundamental building blocks of finance, including its vocabulary. What exactly is meant by an “interest rate factor” and what are the possible instances of such a factor? The question (below) that we analyzed refers to bond yield, spread, and the implied hazard rate. Yield and hazard rates do have specific definitions, but spread requires clarification. (As another example, the question ultimately asks for “risk-neutral” cumulative default probability; what step in the solution does this risk-neutral assumption enable?). I hope you appreciate that we support your aspirations as a Professional by seeking to assist in the clarifications that constitute a robust and coherent toolbox.

1. P1.T2.21.5 Monte Carlo simulation https://trtl.bz/3bwKSG6

2. P2.T9.21.5 Incremental versus component value at risk (VaR) https://trtl.bz/3bs4P0y

1. [Exam Feedback] We have some great feedback about the Part 2 FRM^® exam that was administered over the weekend! https://trtl.bz/3hwvL3b

2. [P1.T1] punchi’s good idea for checking plausibility of a portfolio under CAPM https://trtl.bz/2SIxLuH

3. [P1.T1] Does the CML also map to systematic (beta) risk? https://trtl.bz/33NNwCZ

4. [P1.T2] Why log returns are stationary but lognormal prices are not https://trtl.bz/3yhzxDh

5. [P1.T3] The lease rate is a net convenience yield https://trtl.bz/3bvG57H

6. [P1.T4] Gaussian copula lookup https://trtl.bz/33QA3tW

7. [P2.T5] Dowd’s semiparametric methods https://trtl.bz/3ohKdxo

8. [P2.T6] Counterparty terms: market-to-market (MTM), credit exposure, future value, and potential future value https://trtl.bz/3w9SMgg

9. [P2.T6] Do credit spreads mean revert? https://trtl.bz/3bvFnax

10. [P2.T6] GARP^®’s flawed solution to its classic spread/hazard question https://trtl.bz/3huQOD1

11. [P2.T6] Questions about collateralization (margin) calculations https://trtl.bz/3w6Kd5Y

12. [P2.T8] More on GARP’s repo question https://trtl.bz/3bu6oLH

13. [P2.T9] Grinold’s alpha as a product of skill, volatility, and expectation https://trtl.bz/3ePdGvB

14. [P2.T8] sohinichowdhury asked a fun question: what is the semi-annual dollar-weighted return (aka, IRR)? https://trtl.bz/3w8c3yH

• The Ultimate Guide to Inflation by Lyn Alden https://www.lynalden.com/inflation/

• Axios Capital (another efficient letter) https://trtl.bz/2S3jo44
• Tech, inflation, and the tyranny of the numerator https://lt3000.blogspot.com/2021/05/tech-inflation-and-tyranny-of-numerator.html
• ERM Retooling: Applying problem definition process to risk and opportunity management by Carol Williiams https://trtl.bz/2S0cPza
• How to Calculate Risk Based on Where Your Profits Come From https://trtl.bz/3waDLLb
• GARP U.S. Regulators Lag on FRTB as Europe Deadline Approaches https://trtl.bz/33LnH6F

• Anatomy of a $2 Million Darkside Ransomware Breach https://zetter.substack.com/p/anatomy-of-one-of-the-first-darkside
• The Colonial Pipeline Incident (Brink) https://trtl.bz/2RVUSla
• Security bulletins (Chertoff Group): Cybersecurity Executive Order https://trtl.bz/2RZuoiy and Colonial Pipeline Incident https://trtl.bz/2RX1sbh
• The Ransomware Superhero of Normal, Illinois https://www.propublica.org/article/the-ransomware-superhero-of-normal-illinois
• A Closer Look at the DarkSide Ransomware Gang https://krebsonsecurity.com/2021/05/a-closer-look-at-the-darkside-ransomware-gang/

• Cybersecurity Oversight and Defense (A Board and Management Imperative) https://trtl.bz/3tNaGnH
• Enterprise cybersecurity (McKinsey) https://trtl.bz/3tRI78G

• We’re not ready for the next big climate disasters (NYT) https://trtl.bz/3uSY53n
• The New Basel Framework for Climate Risk Management: Pros and Cons https://trtl.bz/33NB6ef Dr. Marco Folpmers (who always writes helpful articles) refers to BIS: Climate-related risk drivers and their transmission channels https://www.bis.org/bcbs/publ/d517.htm
• The biggest climate stress test so far (Klement on Investing) ttps://trtl.bz/2RnNEGK Refers to the Network for Greening the Financial System (NGFS) https://www.ngfs.net/en

• The ABCs of ESG https://climate.garp.org/insight/the-abcs-of-esg/
• Integrating ESG risk (Accenture) https://trtl.bz/3tNc4qp

• Coursera Conference 2021 Highlights https://trtl.bz/2QrRxtQ
• DataCamp Digest May 2021 https://www.datacamp.com/community/blog/digest-may-2021
• The Future of AI Regulation (Part 4) https://trtl.bz/2RWRMxh
• Time series forecasting at Microsoft (3rd of 3) https://trtl.bz/33Re1r4