Chapter 15

Question 1

what are the 3 methods calculating market risk

Answer 1

• JPM risk metrics model
  -Historic approach
  -Monte carlo simulation

Question 2

what is JPM risk metrics model

Answer 2

(DEAR) estimates how much money they could lose in a single day due to market changes
- expressed as currency
- done on portfolio of assets

Question 3

what is historic simulation

Answer 3

estimates risk by looking at how investment did in the past, looks at data and tries to predict future

Question 4

what is monte carlo simlation

Answer 4

-predicts what ifs scenarios
-comes up with multiple predictions using linear regression to figure out

Question 5

what are the strengths and weaknesses of JPM risk metrics

Answer 5

strengths: simple, fast, considers correlation
weaknesses: assumes normal returns, misses extremes (fat tails), doesnt provide worst case scenerio number

Question 6

what are the strengths and weaknesses of historic model

Answer 6

strength: simple, no calculations, provides worst case scenerio number
weaknesses: only based on 500 observations

Question 7

what are the strengths and weaknesses of monte carlo model

Answer 7

strength: flexible, allows you to assume situations
weaknesses: time consuming