Week in Financial Education (May 17, 2021)

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

P2-T9-monte-carlo

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

P1-T1-capital market line

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

P2-GARP-PQ

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

P2-T8-semi-annual dollar-weighted return

Interesting Links

1. Risk & Finance

consumer-price-index

2. Cyber

colonial-pipeline-cyberattack

3. Climate/ESG

climate-change-central-banks

4. Data etc.

modeling

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