FRMs/PRMs = Which has higher risk?

PtrainerNY · January 27, 2009, 7:28pm

Does A or B have higher risk? A. Ret = 1, StdDev=1 B. Ret = 2, StdDev=2 2. What is less risky a future or corporate paper? I think it’s a future because of mark to market…

Trogdor · January 27, 2009, 9:36pm

B (std), Futures (no default risk, more liquid)

PtrainerNY · March 19, 2009, 4:16pm

Curious why it would be B having higher risk than A.

Blamey · March 19, 2009, 4:29pm

I am not risk person but I would say D has higher risk but the risk costs about the same. The one you choose would depend on your utility curve. If the are not perfectly correlated you best bet would be to combine in a portfolio.

jmh530 · March 19, 2009, 5:13pm

It certainly depends on how you define risk, but I’ll ignore that. The coefficient of variation on each is certainly equal and the probability of each having returns less than 0 is equal at around 15%. However, the Value at Risk for B is twice that for A (similarly the probability of returns being less than -2% is double for B). Just looking at returns being less than 0 is a bit misleading, the size of declines will be greater for B and the probability of more serious declines is also greater.