“Beta does not measure the potential underperformance of our equity portfolio compared with the FTSE ALL share index” “2 FI portfolios could have identical durations and substantially different levels of VAR”
This is the Schweser mock? Not sure on #1. For #2, example I can think of quickly is a portfolio of intermediate-term, LIBOR-based Aaa-rated credits and same term & spread Caa-credits… value at risk would differ b/c return distribution for the latter is much wider.
I forgot where I saw the first statement, but I recall a problem where they gave you a few portfolios and stats and then you had to figure out which would underperform. I got tricked and picked the one with beta < 1 …stupid mistake, didn’t even occur to me that the index could actually…eh…go down?
I guess standard deviation checks the underperformance and not beta. Just guessing 2 is right
This is from CFA 2005 paper guys.
- Beta is just a measure of how the portfolio has moved vs. the market in the past. You could have a portfolio with any beta do awful vs the market in the future. 2. Think about it - you could have a portfolio of junk bonds with a duration of 5 and a portfolio of treasuries with a duration of 5. Don’t you think the junk would have a bigger var?
- I answered “incorrect” because I think of beta as the correlation of returns between the portfolio and the overall market… based on the index name (FTSE All Share Index), I reasoned the index likely mirrored the overall market. So, the beta should be a reasonable proxy for the portfolio’s returns versus the FTSE index. Of course, I was wrong. Notice that the reference reading has been s**t-canned… wonder if the authors addressed this point directly?