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Questions tagged [risk]

The possibility that a negative event (such as a loss) will happen.

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31 views

Transformation of random variables and second-order stochastic dominance

Suppose $X$ and $Y$ are two random variables where $X$ SOSD* $Y$. Let $g(\bullet)$ be a monotonic function and $X'=g(X)$ and $Y'=g(Y)$. Under what conditions of $g$ is $X'$ SOSD $Y'$? I know if $g$ ...
2
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1answer
33 views

Markowitz portfolio risk with PV01 instead of variance

As the PV01 ($= dpdy \times notional$) of a bond is a measure of its risk, as well as its price return variance, could we measure the risk of a bonds portfolio with the Markovitz portfolio variance ...
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28 views

Black Litterman - Sector rotation

I was wondering if anyone here have ever tried to introduce sector rotation with regards to the Black-Litterman model. I want to try to expand the BL model by introducing this feature, however I have ...
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3answers
80 views

How to determine the optimal start capital for a strategy?

Suppose my strategy generates a stream of daily profits distributed like 𝒩[μ=1€, σ=10€]. Intuitively, if I trade with 10€ start capital: I could very well be ruined on the first day, if the first ...
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25 views

How to reasonably aggregate returns across both different assets and different time-horizons?

This might be a somewhat open question, so any suggestion of improvement is welcome. Suppose at time $t=0$, we have $N$ different assets whose weights are $w_1,\cdots,w_n$ ($\sum w_i = 1$), and they ...
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0answers
36 views

Why results might differ when using risk-adjusted returns

Dependent variable is cumulative returns for a 40-trading-day window after an earnings announcement. Independent variable of interest is a variable related to investor attention around the earnings ...
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0answers
18 views

PRIIPS for Category 3 - effect of dividends paid on VEV and scenario calculations

If I use a series of the daily net asset value returns to derive the VEV, corresponding risk class and the unfavourable, moderate and favourable scenarios should I add back all the dividends paid to ...
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1answer
93 views

Calculate unsystematic-risk of a firm in a regression with SD or R2?

i'm studying for a finance exam and i can't answer this question. It is asking me to calculate the unsystematic risk of firm A and i have the following information: Return firm A: 0,1% + 1,...
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2answers
58 views

Imputation of missing returns

I'm trying to calculate a historical VaR for a portfolio of futures, however there are certain days for which some assets are missing prices. Since the portfolio consists of many spread positions, the ...
1
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1answer
71 views

Why Can I not estimate a CVAR from Heston Model

I fit the parameters of Heston model, using option data for SPX. Now I have the process S and P 500 is expected to follow. I make 100,000 simulations of this process and then calculate the expected ...
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0answers
37 views

Simulation VaR and CVar assuming Normal Distribution

Am I missing something? Currently implementing a VaR and CVaR measure assuming normality of wealth value. after executing the following script, VaR is always greater than CVaR, as expected, but ...
2
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3answers
119 views

Risk aversion and risk-free rates

New to finance. When I read textbook like Financial Economics by Bodie, I encountered the following idea, namely, higher risk aversion is associated with higher risk premium and lower risk-free rate. ...
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2answers
60 views

Procedures to follow when VaR model fails backtest

I was wondering what the correct procedure is to follow when a VaR model fails a backtest (either conditional coverage and/or independence tests)? Assuming I am restricted to using a historical VaR ...
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2answers
181 views

Equal Risk Contribution portfolio scipy optimization not working

I'm trying to create a tool for an equal risk contribution portfolio,essentially following this article (https://quantdare.com/risk-parity-in-python/) but it is failing at the last step (def ...
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0answers
40 views

Are the explanatory factors for a firm's expected returns and its expected earnings/valuation multiples the same?

For example, the 3 factor Fama French model explains much of the cross-sectional variation in equity returns. Would these same 3 factors also explain the cross sectional variation in earnings/EV to ...
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1answer
102 views

Total risk from asset allocation and security selection

My company's multi-asset fund has been using risk metrics methodology to calculate ex-ante VaR and tracking error for years. Due to hardware limitation, the calculation only reflects active risk from ...
1
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1answer
80 views

Klein and Chow Orthogonal Transformation - Lowdin Orthogonalization

I've doing research on the orthogonal transformation in Orthogonalized Equity Risk Premia and Systematic Risk Decomposition They borrow a mathematical technique called symmetric orthogonalization ...
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1answer
301 views

Calculate Idiosyncratic Risk?

I have basic finance background but I am trying to calculate idiosyncratic risk as measure for firm risk in my CEO gender research. I have found the following on Alpha architect but I am unsure of ...
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2answers
107 views

How do I calculate bad debt on revolving credit?

I have a revolving credit system. A customer purchases and then has 6 months to pay off the purchase. i.e. Purchase for 60 in Jan and then need to pay 10 a month in Feb, Mar, Apr, May, Jun, Jul. The ...
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0answers
59 views

Statistical methods to compare two financial series data

I have two financial series data, x and x', where x' was formed form ...
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0answers
97 views

Portfolio risk analysis

I would like to ask you if somone knows how to generate risk measures (such as VaR, Beta, Drawdown, Volatility, etc...) over a Portfolio that hold positions for approximately 7 working days. Imagine ...
1
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1answer
122 views

Why is the expected value of bias statistic one?

I have been reading about factor models recently. One of the ways in which the developer of these models (Barra/ Axioma) measure the accuracy of their models is by calculating the bias statistic for ...
2
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1answer
235 views

Calculating Total Risk and Idiosyncratic Risk for individual stocks?

I am working on a research project but am having some trouble wrapping my head around how I need to go about replicating two of key dependent variables from (Serfling, 2014). Total Risk, defined as: ...
2
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1answer
96 views

Risk of Put-Call-Parity in practice

When $C+PV(K) \ne P + S_0$, it's an opportunity for risk-free arbitrage (excluding cost). In practice, what potential risk could make the arbitrage fail? I know that failure to build complete ...
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0answers
51 views

How to compute the portfolio risk when weights are negative?

In QMiF (p. 239) , the variance of a portfolio is defined as: V(R) = w'Vw = w'DCDw = x'Cx Does this formula hold if the weights are negative (i.e., short)? For example, if I have a 5x5 covariance ...
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0answers
74 views

What's the advantages of $EVaR$ over $CVaR$?

$CVaR$, which is short for Conditional Value-at-Risk, has long been accepted by both academe and practice as a good coherent risk measure. Entropic value-at-risk ($EVaR$) is a comparative new coherent ...
3
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1answer
468 views

Absorption ratio by Mark Kritzman

In Principal Components as a measure of systemic risk, the author Mark Kritzman defines absorption ratio (AR) as the fraction of the total variance of a set of asset returns explained or absorbed by a ...
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47 views

Measuring size risk in CAPM. How one could go about?

I am using valuation methods (e.g. CAPM) in order to measure some projects "baseline" return. I'm not using these measures for stocks returns, but to evaluate specific projects (e.g. dam constructions)...
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0answers
38 views

Calculating Flat Price Risk for Physical Commodity Trades

I've been reading Craig Pirrongs Economics of Trading Firms published by Trafigura: https://www.trafigura.com/media/1364/economics-commodity-trading-firms.pdf Very informative read. The point I have ...
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0answers
28 views

How do I prove that every point on the CML (capital market line) has the same RAP (risk-adjusted performance)?

Every point on the CML can be an optimal portfolio when combined with the according riskaversion factor (which creates a unique point on the CML where utility is maximized. But how do I proof that ...
3
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1answer
145 views

What is the industry standard way of calculating and annualizing performance metrics?

Say I am looking at a performance report for a hedge fund manager who trades mostly equities, and they provide me a list of monthly returns for the past 5 years. What is the industry standard way to ...
4
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2answers
192 views

Risk Parity / Equal Risk Contribution with Tail Risk Measures

Risk Parity or (synonymous) Equal Risk Contribution is an approach to portfolio construction which could work in theory with a broad class of risk measures. Yet, all references I have found so far ...
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0answers
31 views

z-score of an active return with a no-volatility benchmark

I don't know how to approach the problem I am having. Basically, the statement I am trying to make is: the fund's return is X standard distribution away from the mean. Normally, for a single fund, ...
2
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1answer
350 views

Calculating beta to market

Let's say we want to compute beta to S&P500 of a portfolio, using 3 years of weekly returns, as of today. We would take each stock in the portfolio and regress the weekly returns of that stock ...
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0answers
69 views

Market Risk - Trading and Banking book in light of Basel III

I can not understand whether Basel III (in the part of market risk) applies both to Trading Book and Banking book or just to the first one. I have read that for what concerns Banking book you only ...
1
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2answers
95 views

Why do par-yield shifts grow faster across the curve than spot-rate shifts when looking at key-rates?

Consider the following 10y key-rate shifts of bond par yields and its implied shift of bond spot rates: Assume we have the key-rates for 2y, 5y, 10y and 30y. The y-axis is in basis points, and the x-...
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34 views

Cramer-Lundberg: Adjustment coefficient does not exist

The question is about Ruin theory and the Cramer-Lundberg model. I am wondering if there is an example of distribution where the MGF is finite, but the adjustment coefficient does not exist. Can you ...
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1answer
77 views

Using Normal Distribution to forecast active return

I wanted advice on how to go about forecasting active return via a standard normal distribution, The asset is a security with annual volatility of 6%. The benchmark is a 5% annual return with 0% ...
2
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1answer
82 views

Sigma moves - annualize return or no?

This might be a very simple dumb question. But when you look at a security's annualized volatility over a 3 year period, assuming the security has an annualized vol of 5% and the drawdown over three ...
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1answer
63 views

Variance covariance matrix - number of periods required

Hi I am reviewing the example of Barra risk model in the following document page 23 there is the statement: "Estimating a covariance matrix for, say, 3,000 stocks requires data for at least 3,...
2
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1answer
88 views

Independence of initial wealth for Constant Absolute Risk Aversion

Suppose a consumer's preference over wealth gambles (lotteries) can be represented by a twice differentiable Von Neumann Morgenstern utility function. Show that the consumer's preference over gambles ...
1
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1answer
71 views

Value-at-Risk and dividend payments

How should dividends be considered when computing Value-at-Risk for a stock portfolio using Historic data. To simplify let's consider a very simple portfolio of one long position on a stock. My VaR ...
1
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1answer
111 views

Calculating Expected Shortfall of combined portfolios

So I am reading lecture notes here: https://courses.edx.org/c4x/DelftX/TW3421x/asset/Week3_var_3_slides.pdf The example is this: We have two independent portfolios of bonds. They both have a ...
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0answers
16 views

Interest risk and credit risk calculations for fung and Hsieh model

I'm running the Fung and Hsieh multifactor model (2004) for European data. I have used the ln returns based on monthly prices (in Euros) from datastream, and I had a few concerns: 1. for interest ...
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1answer
38 views

Knightian Uncertainty Iff Bayesian Probabilistic View Point

If an investor operates under knightian uncertainty, does that investor then have a Bayesian viewpoint on probability implicitly, and vice versa? Has this been answered or do I have a poor ...
1
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1answer
66 views

Creating riskless portfolio in black scholes

$$\begin{align} d\pi &= \theta dV + dS \\[3pt] & = (\theta \partial V/\partial t + \theta \mu S \partial V/\partial S + \theta S^2 \sigma^2 \partial^2 V/2\partial S^2 +\mu S ) dt + (\theta \...
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0answers
190 views

How do I calculate total risk of a portfolio with a beta, unsystematic risk percentage and market standard deviation?

I've been given a portfolio that contains 5 stocks, with each stock having a $\beta = 0.5 $, unsystematic risk of 25% and $\sigma_m = 20% $%. How would I go by calculating the total risk? There is no ...
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1answer
463 views

Semivariance calculation (downside deviation)

what is the accurate formula for semivariance? I see two versions up to now: this version which considers as N (denominator) all the numbers over/under the mean-or any other number. This is the ...
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0answers
44 views

How can I find what Loss Given Default to use

I want to come up with the appropriate loss given default for a commodity derivative in my CVA calculation. would anyone know where I can find this information?
5
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2answers
356 views

What is time-varying risk premium? Forecasting stock returns

I am trying to understand the concept 'Time-varying aggregate risk premium'. Here is an extract from a Forecasting book, written by Rapach and Zhou, "However, rational asset pricing theory posits ...