Questions tagged [risk]

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

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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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51 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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556 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) ...
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53 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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2answers
615 views

Standard deviation of a long-short portfolio with net position zero

I've come across the following question and I'm slightly stuck in answering it: Suppose you have a two-stock portfolio that is long one stock of asset A, and short one stock of asset B, with A ...
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101 views

Units of Risk: Variance vs Standard Deviation

Suppose you are trading two mean-reverting assets, A and B, and that $Covar(A, B) > 0$. You are currently long one unit of A, and are considering buying one unit of B. Compared to the situation ...
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1answer
179 views

Factor sensitivities for EURUSD swap

Trying to understand various risk factors for a EURUSD swap. While I understand why a EURUSD swap would have USD LIBOR, EURIBOR, EURUSD currency as risk factors, why is it that it would also have EUR ...
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86 views

Having only 2 Industry risk factors?

Is it possible to build a risk model that only has 2 industry risk factors? For example, if I wanted just Tobacco and Healthcare industries as risk factors can I do that? If I did that do I have to ...
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5answers
208 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 [-∞,+∞] instead of [-stoplimit, +takeprofit]. A common objection to most models is "...
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1answer
127 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 ...
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83 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 ...
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2answers
133 views

Hedging a stock with its index constituents?

Problem: select and weight 4 constituents of an index to hedge a particular stock I would appreciate any feedback on my approach, here is I would go about it: Create a new index of four ...
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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 ...
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2answers
79 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 ...
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138 views

Where can I find data source for structural models?

I am starting a project to implement the Black-Merton-Scholes model from this book in R. However, I am looking for, ideally free, data sources. Still I have access to a Bloomberg terminal. Can you ...
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1answer
1k 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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1answer
82 views

VaR estimation when returns are not independent, e.g. ARCH

Time series of returns, $r_t$, in finance are often modeled with some type of conditional heteroskedasticity model, e.g. ARCH(1): $$r_t = \sigma_t z_t$$ $$\sigma_t^2 = a_0 +a_1 r_{t-1}^2$$ where, ...
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1answer
174 views

Math basics of Equally-weighted Risk contributions

i'm writing my BA Thesis about "Equally-weighted Risk contributions". Can anyone recommend math books for further understanding of Risk contributions?
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1answer
71 views

Just an FRM ethics question [closed]

Beth Anderson, FRM, is a portfolio manager for several wealthy clients including Reuben Carlyle. Anderson manages Carlyle's personal portfolio of stock and bond investments. Carlyle recently told ...
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1answer
1k views

Is it more common to hedge a mortgage bond portfolio with other bonds as opposed to Interest Rate Swaps? [closed]

Is it possible to get interest rate swaps on mortgages? If not, why not? Are there models that describe this? Any direction would be great.
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1answer
209 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,...
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2answers
125 views

What is the most amount of money the consumer would be willing to pay to play take this gamble?

Suppose a consumer has log-utility over wealth, defined by $u(W) = \ln(W)$. Suppose this consumer has $100$, and is considering taking a gamble in which the consumer flips a coin, and gets $20$ she ...
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1answer
129 views

Implicit relation between risk and reward

I want to differentiate w.r.t. $\sigma^2$ the following equation $u'(Y)\mu$ + $\frac{u''(Y)}{2}$$(\sigma^2 + \mu^2) = 0$ where we can consider $\mu$(reward) as an implicit function of $\sigma^2$(risk) ...
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4k views

Show that convexity of call price as a function of the strike is violated [closed]

European call options with strikes 90, 100 and 110 on the same underlying asset and with the same maturity are trading for 22.50, 18.84 and 13.97 respectively. show that the convexity of the call ...

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