2024EXAM

Question 1

How do you calculate portfolio standard deviation in Excel

Answer 1

SQRT(MMULT(TRANSPOSE(weights),MMULT(VCOV,weights)))

Question 2

How do you compute the correlation between two assets?

Answer 2

Correlation(i,j) = Cov(i,j) / [SD(i) * SD(j)]

Question 3

What does the Lagrange multiplier on standard deviation represent in optimization?

Answer 3

The rate at which portfolio return increases for each unit increase in standard deviation (risk).

Question 4

What is the Shrinkage method used for in financial modeling?

Answer 4

It adjusts the sample VCOV matrix by:

Keeping variances (diagonal) the same

Replacing covariances (off-diagonal) with a weighted average of the sample and a diagonal matrix
Formula: Shrinked VCOV = λ(Sample VCOV) + (1–λ)(Diagonal matrix)

Question 5

What are the two steps in testing the CAPM using regressions?

Answer 5

First-pass: Estimate β for each asset by regressing returns on market index returns.

Second-pass: Regress average returns of each asset on their β to test:

Intercept = risk-free rate

Slope = market risk premium

Question 6

What is the slack of the feasibility constraint if the sum of weights = 1?

Answer 6

Zero – the constraint is binding.

Question 7

Name two good practices in financial statement modeling (besides color-coding).

Answer 7

Use consistent formulas across rows or columns (reduces errors)
Avoid hard-coded numbers within formulas

Question 8

Excel formula to calculate portfolio mean return using weights and expected returns?

Answer 8

=SUMPRODUCT(weights, returns) or =MMULT(TRANSPOSE(weights), returns)

Question 9

How does the Constant Correlation method modify the VCOV matrix?

Answer 9

Keeps variances unchanged

Sets all covariances using the formula:
Cov𝑖𝑗 = 𝜌⋅𝜎𝑖⋅𝜎𝑗
where ρ is the average correlation.

Question 10

What is the formula for 1-day Delta-Normal Value-at-Risk (DNVaR) at a given confidence level?

Answer 10

Portfolio Value
× Portfolio Standard Deviation
× Square Root of the Time Horizon (in days)
× Absolute Value of the Z-score corresponding to the confidence level

Question 11

What happens to VaR if assets are independent?

Answer 11

Correlation = 0 ⇒ lower portfolio standard deviation ⇒ lower VaR

Question 12

Difference between Absolute VaR and Relative VaR?

Answer 12

Absolute VaR: loss vs. initial portfolio value

Relative VaR: loss vs. expected future value

Question 13

How should a financial analyst interpret regression output?

Answer 13

Betas: sensitivity to market/petroleum

t-stats: significance of variables

R²: explanatory power of the model