Skip to main content

Questions tagged [risk]

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

Filter by
Sorted by
Tagged with
0 votes
1 answer
73 views

PCA risk modelling

Been doing loads of reading about PCA, FA and SVD but still fail to understand the fundamentals of how PCA links with factor analysis in the context of risk modelling. Here is where I'm stuck: Given a ...
Ozz's user avatar
  • 1
0 votes
0 answers
35 views

Scenario probability in portfolio optimization

I have few questions regarding linear programming formulation of expectile-based portfolio optimization. From this article on page 51 the LP algorithm is presented. And the problems are that I don't ...
wojtek5739g's user avatar
0 votes
1 answer
64 views

Decompose portfolio in factor risk

I am reading the risk chapter of Grinold Active Portfolio Managment. I understand how to calculated specific and factor risk of my portfolio, what I don't understand is how to calculate how much risk ...
Giuseppe Pes's user avatar
2 votes
1 answer
83 views

Improving Portfolio Optimization on a Mean-Variance Basis

Is there a point to conduct research to improve mean-variance optimization (MVO)? Because I understand that most of the poor performance in MVO is a result of the estimation error in expected returns. ...
KaiSqDist's user avatar
  • 1,474
-2 votes
0 answers
42 views

Futures Spread Contract - How to Structure Risk to Reward

Futures Spread - Contract There is a Futures Spread, Where the Margin reflects a Leverage of 3 to 1 , The Margin for the contract is just $ 210. I ‘am Buying “ 1 Futures Contract September, Selling 1 ...
Calculate's user avatar
  • 109
0 votes
1 answer
61 views

Subpar Results of Historical Portfolio Optimization with Few Assets

Probably a simple question to the P-Quants here, but if you performed portfolio optimization using a historically calibrated covariance matrix (a rolling month of daily returns) with very few assets, ...
KaiSqDist's user avatar
  • 1,474
0 votes
0 answers
30 views

Risk Aversion Coefficient Literature Rationale and Sources

I'm running a Black-Litterman model and for the Risk Aversion Coefficient I have two potential formulas. The first is the standard formula which I believe is used in the original Black-Litterman ...
Farrep7's user avatar
  • 21
2 votes
1 answer
240 views

When optimizing a portfolio for risk parity, can any portfolio weights turn negative?

As the title reads, when performing risk parity optimization (equal risk contribution amongst all assets to the portfolio volatility), is it possible for weights to turn negative? I understand that in ...
KaiSqDist's user avatar
  • 1,474
0 votes
0 answers
46 views

PCA and OLS regression to transform to interest rate risk? [duplicate]

I’ve been working on different interest rate risk transformation methods for swaps and was interested in implementing PCA & OLS regression. I’m looking to bucket my exposure in all tenors to ...
gardensnake's user avatar
0 votes
0 answers
51 views

JP Morgan CreditMetrics

I am trying to apply CreditMetrics on a 2 bond portfolio. As far as I know, this model returns the expected recovery rate and the volatility between those 2 bonds, so my question is how I calculate ...
polo_ hdz's user avatar
2 votes
1 answer
124 views

Cubic Spline Interpolation partial derivative to the point

Still didn't figure out this, so looking for some help, kindly apppreciated. By this blog https://blog.timodenk.com/cubic-spline-interpolation/index.html, the piecewise cubic spline interpolation is ...
imyafeng's user avatar
4 votes
0 answers
102 views

How is option pricing related to the correlation between implied volatlity and the underlying?

The correlation between the index returns (e.g SPX) and its changes in option-impled volatility (e.g. VIX), is strong, stable and negative (the implied volatility feedback effect). To me at least, it ...
Mats Lind's user avatar
  • 1,412
1 vote
1 answer
104 views

Calculating marginal risk contribution of FX for foreign asset portfolio

I am a European investor investing in US equities. My US equities portfolio returns in EUR can be broken down into (1) equities returns in USD terms, and (2) USDEUR spot currency returns. Using the ...
sjedi's user avatar
  • 25
0 votes
0 answers
12 views

constrains of return distribution and risk return trade off

Suppose we have a portfolio $V$, we are only allowed to invest in one stock $S$, its price movement follows the geometric brownian motion, i.e. $dS=S(\mu dt+\sigma dW)$. We are allowed to choose ...
Mango's user avatar
  • 31
0 votes
1 answer
90 views

Why should investors be compensated for accepting systematic risk? [closed]

Investors should be compensated for accepting systematic risk, as it cannot be diversified. Why do the investors need to be compensated for accepting systematic risk? Because no one can avoid it and ...
Boodombie's user avatar
6 votes
2 answers
226 views

On measurements of ambiguity and their shortcomings

Ambiguity in quant finance is defined as the uncertainty in the probabilities of the return distribution, whereas risk is defined as the uncertainty in the returns of the asset. There are various ...
KaiSqDist's user avatar
  • 1,474
0 votes
0 answers
71 views

Potential Future Exposure for vanilla swap

I need to calculate the PFE for vanilla swap. I wonder if it makes sense to simulate the MC scenarios with a 1-factor Hull white model. In my opinion, this model only allows parallel curve ...
SIMO's user avatar
  • 51
0 votes
0 answers
60 views

Taking a set of normally distributed random variables as the sample space to fitting an exponential distribution

Disclaimer, this is my first question/interaction in this forum. Let's assume I have random variables that are normally distributed. Then, say I take the observations that are greater than the mean, i....
ak10's user avatar
  • 1
1 vote
0 answers
46 views

What is the meaning of the asset risk contribution in a long-short portfolio?

If I have a portfolio of weights $\mathbf{x}$ and the covariance matrix of asset returns $\Sigma$ then the volatility contribution per asset is given as standard $\mathbf{x}' \Sigma$. For a standard ...
PyRsquared's user avatar
0 votes
0 answers
89 views

If investors are risk-neutral, should the (equity) risk premium be zero?

I looked up ChatGPT and they stated that the (equity) risk premium should be zero for a risk-neutral world. The definition of a risk-neutral investor is that one is indifferent between additional or ...
KaiSqDist's user avatar
  • 1,474
1 vote
1 answer
140 views

If there was a way to back out implied volatility (IV) from a stock, would it be the same as the IV backed out from an option on that same stock?

I know that it is not possible to back out an IV for a stock, because the concept of IV is based on a model with underlying assumptions applied to pricing an option. I was thinking of why IV is ...
KaiSqDist's user avatar
  • 1,474
2 votes
1 answer
181 views

From parameter risk (sensitivities) to market risk (sensitivities)

In models where the underlying is not modeled directly - such as in the HJM framework or short rate models - how does one then compute the Greeks, i.e. sensitivites wrt. market variables. As an ...
Landscape's user avatar
  • 548
1 vote
0 answers
78 views

Portfolio risk of correlated assets using Mahalanobis distance

I am trying to understand if there is an agreed methodology to measure the total risk in a portfolio of correlated assets. I am taking a simple model of stock prices following geometric Brownian ...
Zac's user avatar
  • 207
1 vote
1 answer
112 views

Value At Risk Modelling for electricity market with negative prices

I'm a bit at loss after trying to find papers regarding tail risk for electricity markets. There doesn't appear to be a whole lot of literature (or perhaps I haven't managed to find it) regarding ...
Alex's user avatar
  • 11
0 votes
2 answers
39 views

Basis risk between future and a non-dividend paying stock

I am a bit confused about the definition of basis risk, and how it applies to a zero dividend stock. A study manual that teaches me about that mentioned basis risk happens when there are mismatches in ...
Preston Lui's user avatar
2 votes
1 answer
438 views

Can PCA be used to transform a ladder of interest rate risk?

The context For traders/market makers on interest rate swaps desks, it is essential to have a model that transforms risk from its most complex representation (i.e. a ladder of every tenor) into a less ...
quanty's user avatar
  • 439
1 vote
1 answer
112 views

Tricky question about returns [duplicate]

I have a list of monthly returns. -10% -20% -70% -30% -15% -60% The total end return is -94.859%. Because you calculate = 100 x (1+ -10%) x (1+ -20%) x ... Now I ...
Orvar Korvar's user avatar
0 votes
0 answers
126 views

CoVaR/dCoVaR modelling using bivariate DCC-GJR-GARCH

For the several weeks, I have been looking for a way to calculate and display the results of my DCC-GJR-GARCH model to picture a dynamic relationship between daily return of, let's say for example, ...
Restu's user avatar
  • 1
0 votes
0 answers
70 views

Estimating risk premium with cross sectional regression

I am trying to estimate a carbon risk premium according to the Fama & MacBeth methodology using a cross-sectional regression approach. Therefore, I regress the excess return in period t+1 on the ...
Jane's user avatar
  • 9
0 votes
0 answers
24 views

Estimating Appropriate Risk Premiums without Comparable Project Data

Objective I wish to estimate an approximate reasonable return (a) for a project, given its inherent risk and risk-free rate, and compare that to the anticipated project return (b). Such that, all else ...
AWaddington's user avatar
1 vote
1 answer
112 views

Fama French Factor adjusted returns

I want to understand the extent to which portfolio performance can be explained by the three Fama French Factor model. I use the following approach: Regress the portfolio's excess returns against the ...
New Guest's user avatar
3 votes
0 answers
79 views

FRTB - Federal Reserve vs Basel

The federal reserve has released its proposed Market Risk rules for Basel III. https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230727a.htm Is anyone aware of any resource that compares ...
Frank Cho's user avatar
2 votes
0 answers
148 views

Standard Deviation and Monotonicity property

I just read that standard deviation is a coherent risk measure, and therefore it should satisfy the monotonicity property: $X_1 \geq X_2 \implies \rho(X_1) \leq \rho(X_2)$ where $X_1,X_2$ are asset ...
Andrei's user avatar
  • 41
0 votes
0 answers
126 views

"fix" a sample covariance matrix which is not positive semidefinite by using daily returns instead of monthly

In the portfolio optimization problem at hand, one of the constraints is that the tracking error should not be greater than $\gamma$. The constraint is therefore: $(\textbf{x}-\textbf{w})^\mathrm{T}\...
D. B.'s user avatar
  • 1
2 votes
1 answer
144 views

Risk of bond calculation

I am studying a course and I am a bit confused on how to find the a bonds $\sigma$. My course mentions the following: Once calculated the expected returns on the bond $\mathrm{E}(r_d)$, we can ...
Dylan Fernandez's user avatar
0 votes
1 answer
50 views

Intuition behind risk-return realation (Mark Joshi's concepts 1.2) [closed]

In Mark Joshi's "The concepts and practice of mathematical finance" section 1.2, it is given an intuitive motivation behind "high risk high returns" claim. It goes as follows: ...
Osvaldo93's user avatar
2 votes
1 answer
287 views

If I know the Price, DV01, and Duration of a Fixed Income instrument, is their approximation for the Convexity?

As the title says, I am looking to see if there is a good approximation for the convexity of a Fixed Income instrument. Say I know all the parameters of the instrument, can the Convexity be written as ...
jonathan's user avatar
  • 133
3 votes
1 answer
485 views

High-frequency risk management methodologies

In a high-frequency environment, such as a proprietary trading firm or market making firm, the primary goal of the risk management team would be to limit potential losses, but how is that done in this ...
FISR's user avatar
  • 117
3 votes
1 answer
225 views

Derivation of optimal portfolio weights using Risk Budgeting approach

In Thierry Roncalli's book Introduction to Risk Parity and Budgeting (2013), he gives an example of particular solutions to the Risk Budgeting portfolio such as for the $n=2$ asset case. The risk ...
FISR's user avatar
  • 117
1 vote
1 answer
181 views

How to construct a forward exposure portfolio with bonds?

I was asked in an interview to get an exposure to 5Y5Y forward rate using bonds alone. Essentially it is short 5Y bond and long 10Y bond, and I needed to compute the relative weights. Regarding risk: ...
Gumtha's user avatar
  • 11
1 vote
1 answer
208 views

Alternative form of mean-variance optimization that uses standard deviation

I'm curious about an exercise found in Optimization Methods in Finance. Exercise 8.2 (pg 143) explores a variant of the more commonly used form of MVO. When I refer to the more common variant I'm ...
ethor's user avatar
  • 21
1 vote
3 answers
265 views

Maximizing Mean+Variance in a Portfolio

Mean-Variance optimization trades off expected returns with portfolio variance. The idea is that excess variance is not desirable. But what if you weren't averse to high variance and you wanted to ...
ethor's user avatar
  • 21
1 vote
0 answers
68 views

How can I correctly assess the risk of real estate debt fund? [closed]

I'm trying to assess the attractiveness of real estate debt funds. I'm very surprised when I look at the investment performance of many of those funds. Many of them have no negative returns, and can ...
Literal's user avatar
  • 111
6 votes
8 answers
2k views

Conceptual problem with risk neutrality-What is a 'risk-neutral world', exactly?

I have persistent, deep problems with the concept of 'risk-neutrality'. To make it more precise, let's look at the following explanation taken from a book: "In a world where investors are risk ...
Big_Fish1994's user avatar
0 votes
1 answer
58 views

Cohort-based model vs. population-based model for mortality

A cohort-based model groups individuals with at least one common characteristic over a period of time through a state-transition process. A population-based model reflects as much information as ...
kdbm27's user avatar
  • 1
1 vote
0 answers
125 views

Minimizing variance of a long short equity portfolio in practice

I understand the finance 101 explanation of how to minimize variance of a long-short portfolio using a covariance matrix. I also know that it doesn't really work because the covariance matrix is ...
helloimgeorgia's user avatar
0 votes
0 answers
415 views

How to annualize sharpe ratio using quarterly data?

Say I have quarterly returns data for a stock. I am currently calculating rolling Sharpe ratios using an eight-quarter forward window. So for example, say I have quarterly returns data starting in ...
TeTs's user avatar
  • 101
0 votes
0 answers
226 views

FX Risk Reversal - RHS/LHS - Strike adjustments

I was wondering why ppl use the wordings being „rhs/LHS“ right hand side / left hand side when having an risk reversal for example Long EUR Call / USD Put and Short EUR Put / USD Call. Do they refer ...
Mostdoisneverdone's user avatar
0 votes
0 answers
47 views

Relationship between Sharpe Ratio and Investment Horizon in a theoretical IID return world

In his paper, "The Statistics of Sharpe Ratio", Andrew Lo writes "hence, the ratio will increase as the square root of q, making a longer horizon investment seem more attractive. This ...
fan005's user avatar
  • 1
2 votes
0 answers
283 views

Does a portfolio on efficient frontier also lie on CML(capital market line)?

I am trying to solve this question: Assume that CAPM is true. The risk-free rate is 3%, the expected return on the market portfolio is 10% and the standard deviation of the return on the market ...
TrueWarrior09's user avatar

1
2 3 4 5
12