Questions tagged [risk]
The possibility that a negative event (such as a loss) will happen.
480
questions
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0answers
99 views
FX Delta of a cross currency basis swap
I would like to understand in which case there is a presence of FX delta risk factor when trading a Cross-currency basis swap.
By FX Delta, I mean the sensitivy of my swap PV with respect to FX Spot ...
0
votes
2answers
38 views
10-day VaR for a portfolio
So, Bank ANZ owns a portfolio of options on the USD/GBP exchange rate. The delta equivalent position of the portfolio is GBP 56.00. The current exchange rate is 1.5, with a daily volatility of 0.7 ...
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1answer
51 views
Calculation of Regulatory Capital
As per my understanding, the Regulatory capital for a Financial institution is calculated as sum of ...
1
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0answers
63 views
Portfolio Risk Contribution
I came across a paper that shows calculations for two types of portfolio risk contribution. The first shows "Asset risk contributions" and the second shows "Correlation-weighted asset ...
0
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4answers
108 views
Where can I find a current tail risk indicator?
The definition of tail risk (risk of 3-standard deviations movement) seems to imply there would be a current market indicator for this.
Is there such an indicator available somewhere?
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2answers
159 views
The best “risk measure” for an investor who does not want to lose any of his seed money
Question
There is an investor who is afraid of losing any of his seed money (initial investment).
Variance of investment returns is not a problem to him. He is willing to take variance as long as he ...
3
votes
0answers
44 views
What is relationship Risk,Market Price of Risk and it's sign?
Now I'm studying this textbook ( Fixed Income Securities by Veronesi ).
But this page gets me some trouble.
I know that yield and Bond Price have negative relationship. But in this image, it says ...
1
vote
1answer
130 views
Monte Carlo simulations of correlated stocks by Geometric Brownian motion
I am trying to simulate using a Geometric Brownian Motion process three autocorrelated stocks.
In particular, I need to simulate three different matrices with 1000 scenarios each using a Monte Carlo ...
1
vote
0answers
74 views
Show that portfolio's percentage contribution to loss (PCL) equals PCR (risk)
I came across this question during self study on a quantitative book (Question 3.6 on Page 75 of Quantitative Equity Portfolio Management: Modern Techniques and Applications By Edward E. Qian, Ronald ...
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0answers
33 views
Is there no fix to improving portfolio risk estimation under small sample size?
When asked if copula are needed to calculate portfolio Value-at-Risk, it is said that "You can use historical method if you have sufficiently enough data". But actually copula are also ...
1
vote
1answer
51 views
Risk-Neutrality: Discount factors of the $P$ world according to risk preferences?
I am coming to terms with the connections between the so-called $P$ world and the $Q$ world. In my understanding, the risk-neutral measure $Q$ induces a probability space under which investors are ...
1
vote
2answers
64 views
Industry or academic standard frequency to report the return, standard deviation, and Sharpe ratio?
Everyone (funds, banks, academics, financial information sites etc.) reports the annualized return, standard deviation, and Sharpe ratio. Yet we never get to know what the basis of their computation ...
1
vote
1answer
41 views
Why is standard error used to show diversification effect for unsystematic risk?
quite long text incoming, sorry for that: While reading a corporate finance textbook, i came across a section describing the effect of diversification as well as the systematic and unsystematic risk. ...
3
votes
1answer
169 views
Are momentum returns negatively skewed?
In the academic literature, I found that momentum returns are negatively skewed (e.g. Daniel and Moskowitz, 2002). As far as I understand, this usually happens when the "past losers" rebound ...
1
vote
2answers
232 views
Approximating Sharpe and Sortino ratios from Exponential moving averages
So I've been studying the paper "Learning To Trade via Direct Reinforcement" Moody and Saffell (2001) which describes in detail how to use exponential moving estimates (EMAs) of returns at ...
1
vote
1answer
83 views
Portfolio vs individual security Sharpe and Sortino ratios
For an individual security calculating it's Sharpe and Sortino ratios is straightforward.
What I'm curious about is the following:
Let's say I have a portfolio of several securities, which is a ...
0
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0answers
39 views
Multi-period Basel/Vasicek formula
I need to apply Basel/Vasicek formula to a 20-years horizon, both from a 20-years cumulative perspective and year-on-year basis.
Please find below the formula of the Basel Capital (ie. unexpected loss)...
0
votes
2answers
237 views
Why is portfolio optimization a convex problem if variance is concave?
Variance is concave, so portfolio risk must be too.
The mean-variance model employs quadratic programming to optimize (minimize) portfolio risk. My understanding is that quadratic programming requires ...
-1
votes
1answer
54 views
Good ways to select best decision among N decisions, each with a profit/loss distribution? [closed]
I'm working on a problem where an asset owner (e.g., owner of a factory, power plant, etc.) can take a number of possible decisions (say 10). Each of those 10 decisions entails certain actions, but ...
2
votes
3answers
316 views
Backtesting of Risk models
I am wondering if there is any difference between 2 terms call model backtesting and model validation from the perspective of <...
0
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0answers
26 views
lot size formula for cfd and forex based on risk percentage
I have a question regarding the calculation of the lot size for cfd and forex instruments when we have a risk amount as a percentage of the balance.
So how to compute the lot size to trade knowing the ...
2
votes
2answers
263 views
Cashflow Risk vs Discount Risk
Studying asset pricing, I often hear the terms cashflow risk and discount risk but I'm not sure what they mean? The Campbell/Shiller (1988) decomposition includes cashflows (future dividends) and ...
3
votes
0answers
43 views
ESG risk factors
In the context of EU action on sustainable finance, the European Commission has initiated a series of regulations in order to achieve the goals of Paris Agreement on sustainability.
One of those ...
0
votes
1answer
46 views
Textbook about methodologies for computing margins (TIMS and SPAN)
I'm reading and trying to understand TIMS and SPAN methodologies for margin calculations. In the internet I found these 2 great resources and that's what I'm using to get familiar with things:
TIMS
...
6
votes
3answers
1k views
Which is riskier: a call option or the underlying?
From Joshi's Quant Interview Questions and Answers:
What is riskier: a call option or the underlying? (Consider a one day time horizon and compute which has bigger Delta as a fraction of value).
I ...
2
votes
1answer
65 views
liquidity of a portfolio of options
In the asset management industry, many reports contain liquidity metrics such as the no. of days to liquidate 95% of a position, based on a certain participation rate.
If that position is a stock or a ...
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votes
2answers
83 views
Is there a way to formulate a Martingale series that will never explode?
Martingale's betting method can be seen here:https://www.investopedia.com/articles/forex/06/martingale.asp My question is if there is a way to put a non-exploding martingale,
[There is one attempt to ...
4
votes
0answers
33 views
Is there a clear mathematical statement of what problem Hierarchical Risk Parity is solving?
Prado's paper is really just an algorithm for solving some inverse problem. Has anyone seen a clear statement of that inverse problem? Or do you know how to write it simply?
The first step is just a ...
1
vote
1answer
87 views
Risk-Weighted assets and Risk Weight
I am not really sure I understand the meaning of Risk weight defined as
RW = RWA/EAD,
where
EAD = Exposure at Default
RWA = Risk-Weighted assets
From a bank's perspective: If I have two portfolios, ...
6
votes
1answer
224 views
Optimizing a portfolio whose risk is target expected shortfall
I want to maximize the return of a $n$-asset portfolio under known risk:
$$\max_{\{w \in \mathbb{R}^{n}|w_{1}+...+w_{n}=1\}} \; \mathbb{E}\left[\sum_{i=1}^{n}w_{i}R_{i}\right]$$
under the constraint
$$...
0
votes
1answer
73 views
Ratios or combinations of risk measures
In finance, alternative risk measures such as value-at-risk (VaR) and GARCH are introduced as replacements to standard deviation volatility.
Is there any application or value where several risk ...
0
votes
0answers
7 views
Valuating risky annuities. (Default & Recovery)
As the topic says, I want to price a risky annuity. There are 2 things that I'm uncertain of.
Whether the probability of default is correctly defined.
Value of payments in the event of default.
In ...
0
votes
0answers
18 views
scenario-specific covariance matrices for minimum regret portolio allocation
I am trying to follow the paper here https://www.wiwi.uni-siegen.de/banken/dokumente/2._szenariobasierte_aa_englisch.pdf and implement the minimum regret approach. In particular, the decision under ...
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0answers
56 views
Why is Calmar ratio considered not to satisfy monotonicity?
We have the following definitions
$\text{Gain-loss ratio} = \frac{E[X^+]}{|E[X^-]|}=\frac{E[X^+]}{-E[X^-]}=\frac{E[X]}{-E[X^-]}+1$;
where $X$ are the returns, $E[X^+]$ is the expected gain, i.e. $E[X|...
2
votes
2answers
90 views
Definition of drawdown
Say I am considering the entire time horizon, is max drawdown what I've drawn in blue, or what's in purple?
Likewise, how about the current drawdown for the period in black (in practice, I am asked ...
0
votes
1answer
89 views
how to relate risk aversion and sharpe ratio in optimisation
I am trying to optimise the following:
U(w)=wā²Ī¼āĪ»/2wā²Ī£w
which is the typical risk aversion problem.
I would like to set lambda in order to have the max sharpe but I cannot find in literature what is ...
0
votes
2answers
53 views
Binomial model and delta hedging
I've got a question about theory which is probably a one line answer. I use to understand it but I'm stuck right now.
In the Binomial model, we define the progression of the price as:
$$
S_k = S_{k-...
-1
votes
5answers
218 views
Why worry about fat tails, if you can use stoploss?
Sorry this might sound a silly question, but -humbly- I don't understand why models assume that returns range from [-ā,+ā] instead of [-stoplimit, +takeprofit].
A common objection to most models is "...
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0answers
69 views
Sign of DV01 for FRA and IR Swap and Their Relationship
I'm confused with the sign notion (positive or negative) of DV01 for FRA and IRS.
Say if I short FRA and also long IRS (pay fixed receive Float) with same underlying, does that mean both dv01 of these ...
0
votes
0answers
28 views
Results of Fama french three factors model and Fama MacBeth cross sectional regression
I am doing research work on āIdiosyncratic volatility and stock returnā.
I have calculated Idiosyncratic volatility with the help of Fama french three factor model. IV is defined as the standard ...
1
vote
0answers
56 views
Results of Fama MacBeth regression
I have run Fama MacBeth cross section regression of of Excess Return of stocks on Idiosyncratic volatility, the log of market capitalization, book to equity ratio and Beta. I'm getting all significant ...
1
vote
0answers
43 views
Currency of CDS and adjustment of interest rated for country risk
I have question concered currency of the CDS spreads.
In the analysis I am conducting, I perform adjustment of interest rates for country risk (CDS could be a reference to reflect a country risk).
...
4
votes
1answer
70 views
CRRA Ultilityļ¼ simple question
for CRRA, does increasing gamma leads to increase in risk-aversion?
Looking at the curve, I think increasing gamma leads to less in risk-aversion (since the risk preimum is less). But in terms of ...
2
votes
1answer
36 views
Properties of risk aversion
What are some common properties for risk aversion?
I know the basic definition of the risk premium, absolute risk adversion, relative absolute risk adversion. Besides the basic definition, what are ...
1
vote
1answer
78 views
The ratio of upside deviation to downside deviation in portfolio weighting
I've been calling this ratio "acceleration" in my head, so I'll do the same in this post. The question is, is this relationship used anywhere and if so, how? My thought process is as follows.
Risk ...
-1
votes
1answer
90 views
Risk Neutral Pricing, a quick question [closed]
I am a newbie.
The risk neutral pricing has the following formulation:
$$P=\frac{\hat{E(d)}}{R}$$,
But the discounted expected value has the formulation of:
$$P=\frac{E(d)}{R}$$.
The text book ...
0
votes
0answers
27 views
relation between duration and credit risk
I am curious if there is a relation between duration and Credit risk measure for callable bonds. I recall seeing it somewhere but can't find the details. Credit risk measure would be sensitivity of 1 ...
0
votes
1answer
199 views
Computing covariance matrix with historical data
I have been reading Active Portfolio Management by Grinold and Khan. In the chapter about risk, they mention,
"The third elementary model relies on historical variances and covariances. This ...
1
vote
1answer
131 views
Determining Value at Risk of a Poisson distribution
If my discrete random variable had a poisson distribution with both moments say equal to 10, how can I find the Value at Risk for a 95 percent confidence interval?
I have seen that I need to ...
3
votes
1answer
62 views
Economic interpretation of Time-varying beta (systematic risk) in portfolio analysis
What is the economic interpretation of Time-varying beta (systematic risk) in portfolio analysis and the main economic difference with costant beta. I'm not interested in how to estimate it but just ...
