Measures of Risk and Performance Flashcards
2 main differences between the formula for variance and the formula for semivariance.
Identical except semivariance formula only includes the negative deviations and a smaller number of observations in the denominator.
What are the main differences between the formula for semistandard deviation and target semistandard deviation?
Similar except target semivariance substitutes the investor’s target return in place of the asset’s mean return.
Define tracking error and average tracking error.
Tracking error indicates the dispersion of the returns of an investment relative to a benchmark return, where a benchmark return is the contemporaneous realized return on an index or peer group of comparable risk.
Average tracking error simply refers to the average difference between an investor’s return relative to its benchmark. In other words it is the numerator of the information ratio.
What is the difference between value at risk and conditional value-at-risk?
Value at risk is the loss figure associated with a particular percentile of a cumulative loss function. Or, the maximum loss over a a specified time with a specified probability.
Conditional value at risk is the expected loss given that VaR has been equalled or exceeded.
Name the two primary approaches for estimating the volatility used in computing value-at-risk.
- Estimate the volatility as being equal to the asset^s historical volatility.
- Estimate volatility based on the implied volatilities from option prices.
What are the steps involved in estimating he VaR from historical data?
- Collect percentage price changes
- Rank gains/losses from highest to lowest
- Select the outcome (loss) reflectign the quartile specified by the VaR.
When is Monte Carlo analysis moost appropriate as an estimation technique?
In difficult problems where it is not practical to find expected values and standard deviations using mathematical problems.
What is the difference in the formulas for the Sharpe and Treynor ratios?
Treynor uses systematic risk rather than total risk in the denominator.
Define return on VaR
RoVaR is the expected average return of the asset divided by a specified VaR.
Describe the intuition of Jenson’s alpha.
Jenson’s alpha is a direct measure of the absolute amount by which an asset is estimated to outperform., the return on efficiently priced assets of equal systematic risk in a single-factor market model.
