Test if you fully understand VAR, which are incorrect and why? “VAR is a useful measure to assist in interpreting the volatility of cash flows, as part of an overall measure of total risk” “Credit VAR is concerned with the lower tail of the distribution, rather than the upper tail” “A problem of VAR is clearly identifying the secondary and tertiary effects of a given hypothetical event” “Using the covariance VAR method, the probability of a large loss is understated” “Stress tests do provide information that can be used in internal capital budgeting decisions” “In relation to changes in yield curve shifts and twists, with fixed income portfolios, effective duration is the superior risk measure”
- Correct 2. Correct 3. Correct 4. Correct 5. Correct 6. Incorrect, but can’t tell you why
for 2, no, credit VaR is concerned with the upper tail. Why - it’s only when you are in the black (expecting receipt of cash) that you are exposed to credit risk of the counterparty defaulting. for 6, no. effective duration used for mortgages, but no duration measure captures yield curve twists.
CPierce Wrote: ------------------------------------------------------- > 1. Correct > 2. Correct > 3. Correct > 4. Correct > 5. Correct > 6. Incorrect, but can’t tell you why sorry to burst your bubble, but all of them are incorrect except for 4 and 5
whystudy Wrote: ------------------------------------------------------- > Test if you fully understand VAR, which are > incorrect and why? > > “VAR is a useful measure to assist in interpreting > the volatility of cash flows, as part of an > overall measure of total risk” CFAR is - not sure VAR is. FALSE > > “Credit VAR is concerned with the lower tail of > the distribution, rather than the upper tail” FALSE > > “A problem of VAR is clearly identifying the > secondary and tertiary effects of a given > hypothetical event” I will find a space to write WTF if I see this. I can’t see it being a problem with VAR - more a problem with your internal control system, whatever one of those is. FALSE > > “Using the covariance VAR method, the probability > of a large loss is understated” What is the covariance VAR method? Covariance is less than variance in isolation, so assuming this thing is a thing that exists - TRUE > > “Stress tests do provide information that can be > used in internal capital budgeting decisions” TRUE I guess. Does this include Risk budgeting? > > “In relation to changes in yield curve shifts and > twists, with fixed income portfolios, effective > duration is the superior risk measure” It’s better than beans. True. Guess
3 : Don’t understand what are the secondary and tertiary effects of a given hypothetical event. 4 & 5 : Why these two are correct ?
“VAR is a useful measure to assist in interpreting the volatility of cash flows, as part of an overall measure of total risk” “Credit VAR is concerned with the lower tail of the distribution, rather than the upper tail” “A problem of VAR is clearly identifying the secondary and tertiary effects of a given hypothetical event” “Using the covariance VAR method, the probability of a large loss is understated” “Stress tests do provide information that can be used in internal capital budgeting decisions” “In relation to changes in yield curve shifts and twists, with fixed income portfolios, effective duration is the superior risk measure” - wrong; VAR is a minimum loss @ certain probability method and has nothing to do with cash flow. - wrong; Credit VAR is concerned with the upper most part of the distribution seeing how much you can get paid. - wrong; this is only true for monte carlo or scenario analysis with diffuse jumps. - So true; when all goes to shit, your correlations converge up so your risk is understated. - True; you can see where breaking points are and if your WACC should be adjusted higher to compensate for those breakpoints. - wrong; you use key rate durations.
No duration measure captures yield curve twists? What about key rate duration?
i’m so screwed
ouch… I thought I mastered this subject… thanks for the review… if you have more, please post them!
here a more recent thread: https://www.analystforum.com/forums/cfa-forums/cfa-level-iii-forum/91339687#comment-91819557
I suspect that someone who was a Level III candidate 8 years ago couldn’t care less about a more recent thread.