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

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1answer
38 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
104 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
55 views

Statistical methods to compare two financial series data

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

Bubble detection: R package MultipleBubbles

I would like to use the R package "MultipleBubbles" with different variations of the ADF test (augmented Dickey-Fuller test). These methods should facilitate the detection of financial bubbles. For ...
0
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0answers
69 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
vote
1answer
61 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 ...
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0answers
19 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
votes
1answer
81 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
28 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
60 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
votes
1answer
138 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 ...
0
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0answers
39 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)...
0
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0answers
17 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
18 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
votes
1answer
96 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
votes
2answers
115 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 ...
2
votes
0answers
22 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
votes
1answer
272 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
38 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
57 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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0answers
26 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 ...
0
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1answer
64 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
votes
1answer
79 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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votes
1answer
41 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
votes
1answer
75 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
vote
1answer
50 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
vote
1answer
48 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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votes
0answers
15 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 ...
1
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1answer
37 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
vote
1answer
56 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 \...
0
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0answers
85 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 ...
0
votes
1answer
113 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
35 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
votes
2answers
145 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 ...
1
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1answer
45 views

An ad hoc portfolio optimization scheme

Say at each time $t$ I have a covariance matrix for the next period. Call this $\Sigma_{t+1}$. If I choose portfolio weights $w$ to minimize the variance, subject to the constraint that $\sum_i w_i = ...
1
vote
1answer
109 views

What is the name of this VaR calculation strategy?

Here's a question on a passage from this paper I'm reading. Here's the quote: Given the vector of portfolio weights $w$, and the estimate of the conditional variance, $\Sigma_{t,k}$, the ...
1
vote
1answer
111 views

Risk Management methods for Stock portfolio with ~30 stocks

What is ideal Risk Management method/methods s for stock portfolios with 25-30 stocks and around 50.000 USD invested in those stocks. Every stock bought will be kept in the portfolio for 1 to 12 ...
0
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1answer
138 views

conditional probability of default

I would like to ask the following question. I would appreciate if someone could help me out. On what argument is based that states that conditional default rates ( loans of corporate borrowers) ...
2
votes
1answer
142 views

Total Return Swaps and Borrow Cost Relationship

If an investor is long a Total Return Swap (TRS), they get the total return (ie, including dividend) performance and usually pay LIBOR minus a spread. This spread should trade ...
0
votes
0answers
25 views

Choosing the DoF for a t-copula when copulafit doesn't work

I'm currently writing my Master thesis where I investigate some different methods of dimension reduction regarding Value at Risk for very large equity portfolios. My current data set contains of 5000 ...
1
vote
1answer
70 views

Portfolio risk estimation through variance covariance matrix

Is the portfolio risk calculated through variance covariance matrix an estimate of the current risk of the portfolio? Suppose I am using the weights as of today, and I have estimated the variance ...
1
vote
2answers
222 views

Basis risk, spreads and discounting

There is a lot of information to be read on basis risk, spreads and discounting. After reading some information, I have an idea about what basis risk is about and why this type of risks should be ...
1
vote
1answer
189 views

Mark to Market of a CDS Contract and Risky Annuities

From JP Morgan's Trading Credit Curves 1 and we have that: The MTM of a CDS contract is (for a sell of protection) therefore: $$\text{MTM} = (S_{\text{Initial}}-S_{\text{Current}}).\text{...
2
votes
3answers
117 views

Does longer time horizon necessarily imply reduced risk?

Is there a mathematical/statistical basis for the commonly-held belief that the longer certain assets (particularly equities) are held, the less risk the investor is exposed to? Alternatively, is ...
2
votes
0answers
39 views

VaR decomposition of non-normal portfolio by g-and-h distribution

According to Doowoo Nam (2013), VaR of non-normal portfolio returns approximated by g-and-h distribution can be decomposed pretty much in the same way as the VaR of a portfolio with normal returns. ...
0
votes
1answer
38 views

Heuristic (or algorithm) for calculating a risk premium, given a probability of default and a “minimum” profit margin (expressed as a yield)

Assuming that I have means of determining and calculating the following metrics: Risk (i.e. probability*) of a default to a particular borrower as P Profit margin of X% The profit margin is taken to ...
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votes
1answer
78 views

Calculating the Risk Free Rate [closed]

I have an assignment and I have to calculate the risk-free rate with the following data: Stock A: E(R) = 10% ; Standard Deviation = 5%. Stock B: E(R) = 20% ; Standard Deviation = 10%. I also ...
3
votes
1answer
153 views

Can portfolio Value-at-Risk be calculated analytically for multivariate t-distributed returns?

It is widely known that VaR is generally not sub-additive in all but the most restrictive cases (typically when a Gaussian return distribution is assumed, which fails when it matters the most). ...
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0answers
18 views

Which Firm Characteristics may have an influence on Coskewness

Latest since Kraus and Litzenberger (1976), higher order moments of the return distribution are considered relevant for asset pricing. In line with that, Harvey and Siddique (2000) and Barone Adesi ...
3
votes
1answer
79 views

How do energy companies measure the magnitude of the risks of buying energy at a variable price and selling it at a fixed price?

Power and gas retailers are exposed to a variety of risks when selling to domestic customers. Many of these risks arise from the fact that customers are offered a fixed price, while the retailer must ...