Old Exam Questions

Risk Management and Investment Management Professor's Note Module 5, Risk Management and Investment Management, is relatively new to the FRM curriculum. As a result, fewer old exam questions exist for this material. 1. An analyst has compiled the following information on a portfolio Calculate the semi-standard deviation of the portfolio. 2. Suppose the daily returns of a portfolio and a benchmark portfolio it is replicating are as follows Portfolio Return bps Benchmark Portfolio Return bps What...

Old Exam Answers

Risk Management and Investment Management This question is really a test as to whether the candidate knows the components of the Sortino ratio. . . Average Portfolio Return Risk-free Rate 12 2-475 12 2-475 0.82 - -1 2 9.08 See Topic 72 Question from the 2006FRM exam. A. Correct. Tracking error is the standard deviation of the difference between the return of the managed portfolio and the benchmark portfolio. TE sigma Rp - RB E Rp - RB 2 - E Rp - RB 2 1 2 and E Rp - RB 4 -2 6 0 14 2.00 E Rp - Rb...

Relative Performance of Hedge Fund Strategies

AIM 77.2 Compare the relative performance of various hedge fund strategies. To assess the relative performance of various hedge fund strategies, we compare the returns of the 1,610 hedge funds in the 11 different fund styles reported in the TASS Live fund database from February 1986 through September 2005. The funds in the sample are required to report their returns in U.S. dollars and have 36 months of net-of-fees returns. The number of funds in the sample varies across the fund style...

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The following example illustrates the calculation of expected active beta return, active beta surprise, and benchmark timing return given portfolio return information. Data for the active portfolio beta and the benchmark returns for one year over 12 consecutive months is given in Figure 3. Long-term expected excess benchmark returns are selected to be 6 . All other values are calculated, as described as follows. Performance Analysis Examining Active Systematic Returns Figure 3 Column 1 t 12...

Global Macro Strategies

Managers pursuing global macro strategies form expectations regarding price changes in global capital markets and take long and short positions in interest rates, equities, currencies, and commodities based on the capital market outlook. Risk control with downside protection and stable returns is generally a goal of global macro managers. However, managers differ in their use of discretionary and systematic trading methods. Highly discretionary managers use many trading strategies sometimes...

Regulation D Strategies

Securities Act of 1933 allows public companies to raise capital through private placements of unregistered securities. Private placements are cheaper and less time consuming than public issuances of securities and are thus an attractive alternative. In a Regulation D strategy, a hedge fund manager takes a long position in privately placed unregistered securities stocks, convertibles, options, or warrants issued by a publicly traded small or micro capitalization company....

Fixed Weight and Rolling Window Clones

AIM 77.5 Distinguish between fixed-weight and rolling-window clones, explain their construction and compare the differences between these strategies. Two versions of the multifactor model are used to create linear clones that replicate the factor exposures of hedge funds. The first version is the fixed-weight methodology, which uses the whole sample and has the portfolio weights constant through time. The second version is the rolling-window methodology, which is used to reduce the look-ahead...

Managing Portfolios Using VAR

AIM 74.8 Demonstrate how a manager can manage risk by using marginal VARs to make decisions to lower portfolio VAR. A manager can lower a portfolio VAR by lowering allocations to the positions with the highest marginal VAR. If the manager keeps the total invested capital constant, this would mean increasing allocations to positions with lower marginal VAR. Portfolio risk will be at a global minimum where all the marginal VARs are equal for all i and ' We can use our earlier example to see how...

Hedge Fund Incentive Structures

AIM 76.3 Analyze the implications the incentive structure of hedge funds have on the risk and performance of the funds. Strict regulations govern the compensation contracts of mutual fund managers. For one thing, the compensation must be symmetric. Symmetric compensation means the negative and positive effects on compensation from losses and gains, respectively, must be equal in absolute value terms. The easiest and most often used symmetric compensation method is to make a manager's...

Budgeting Risk

AIM 75.13 Explain how to budget risk across asset classes and active managers. Risk budgeting should be a top down process. The first step is to determine the total amount of risk, as measured by VAR, that the firm is willing to accept. The next step is to choose the optimal allocation of assets for that risk exposure. As an example, a firm's management might set a return volatility target equal to 20 . If the firm has 100 million in assets under management and assuming the returns are normally...

Component VAR

AIM 74.6 Compute component VAR in a portfolio with a large number of positions and use it to decompose VAR. Component VAR for position i, denoted CVAR , is the amount a portfolio VAR would change from deleting that position in that portfolio. In a large portfolio with many positions, the approximation is simply the marginal VAR multiplied by the dollar weight in position i CVAR MVARj X wj x P VAR x . x w Using CVAR , we can express the total VAR of the portfolio as Given the way the betas were...

Active Systematic Returns

Active returns are defined as the difference between the manager's portfolio returns and the benchmark returns. As described in AIM 73.5, total active returns can be defined as having two components a systematic portion and a specific or residual portion. 3pA x Rg , remember, is the active systematic portion. This portion can be further decomposed into the following three components for further analysis. Expected active beta return is the return that results from the product of average active...

Objectives of Performance Analysis

Performance analysis refers to return-based performance analysis basic and advanced and portfolio-based performance analysis. Return-based performance analysis is a method of assessing both risk and returns of an investment. The advanced method adds statistical and theoretical refinements to the basic models. Portfolio-based performance analysis attributes single period realized returns to various sources and then tests these attributed returns for statistical significance in order to draw...