Chapter 5 CAIA Flashcards
Shortfall Risk
Shortfall risk is simply the probability that the return will be less than the investor’s target rate of return.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 102). Wiley. Edición de Kindle.
Target Semi Variance
Target semivariance is the dispersion of all outcomes below some target level of return rather than below the sample mean return.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 102). Wiley. Edición de Kindle.
Target semi standard deviation
Target semistandard deviation (TSSD) is simply the square root of the target semivariance.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 102). Wiley. Edición de Kindle.
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. Although tracking error is sometimes used loosely simply to refer to the deviations between an asset’s return and the benchmark return, the term tracking error is usually defined as the standard deviation of those deviations,
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (pp. 102-103). Wiley. Edición de Kindle.
Drawdown
Drawdown is defined as the maximum loss in the value of an asset over a specified time interval and is usually expressed in percentage-return form rather than currency.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 103). Wiley. Edición de Kindle.
Maximum Drawdown
Maximum drawdown is defined as the largest decline over any time interval within the entire observation period.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 103). Wiley. Edición de Kindle.
VaR
Value at risk (VaR) is the loss figure associated with a particular percentile of a cumulative loss function. In other words, VaR is the maximum loss over a specified time period within a specified probability.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 104). Wiley. Edición de Kindle.
Specification of VaR parameters
- The length of time involved in measuring the potential loss
- The probability used to specify the confidence that the given loss figure will not be exceeded
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 104). Wiley. Edición de Kindle.
CVaR
Conditional value-at-risk (CVaR), also known as expected tail loss, is the expected loss of the investor given that the VaR has been equaled or exceeded. Thus, if the VaR is $1 million, then the CVaR would be the expected value of all losses equal to or greater than $1 million. The CVaR provides the investor with information about the potential magnitude of losses beyond the VaR.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 105). Wiley. Edición de Kindle.
Parametric VaR
A VaR computation assuming normality and using the statistics of the normal distribution is known as parametric VaR.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 106). Wiley. Edición de Kindle.
Monte Carlo Analysis
Monte Carlo analysis is a type of simulation in which many potential paths of the future are projected using an assumed model, the results of which are analyzed as an approximation to the future probability distributions. It is used in difficult problems when it is not practical to find expected values and standard deviations using mathematical solutions.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 109). Wiley. Edición de Kindle.
Four Properties of the Sharpe Ratio
It is intuitive. Using annual or annualized data, the Sharpe ratio reflects the added annual excess return per percentage point of annualized standard deviation.
It is a measure of performance that is based on stand-alone risk, not systematic risk. Therefore, it does not reflect the marginal risk of including an asset in a portfolio when there is diversifiable risk.
It is sensitive to dimension. The Sharpe ratio changes substantially if the unit of time changes, such as when quarterly rates are used rather than annualized rates.
It is less useful in comparing investments with returns that vary by skew and kurtosis.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (pp. 113-114). Wiley. Edición de Kindle.
Four Properties of the Treynor Ratio
It is highly intuitive. Using annual or annualized data, the Treynor ratio reflects the added annual excess return per unit of beta.
It is a measure of performance that is based on systematic risk, not stand-alone risk. Therefore, it does not reflect the marginal total risk of including an asset in a portfolio that is poorly diversified.
It is directly proportional to its dimension. The Treynor ratio varies directly with the unit of time used, such that ratios based on annualized rates tend to be four times larger than ratios based on quarterly rates.
It is less useful in comparing investments with returns that vary by skew and kurtosis, because beta does not capture higher moments.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 115). Wiley. Edición de Kindle.
What is the most common measure of financial risk known as?
Standard deviation of returns, also known as volatility, is the most common measure of total financial risk.
Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 101). Wiley. Edición de Kindle.
Semivariance
Some risk measures focus entirely on the downside of the return distribution, meaning that they are computed without use of the above-mean outcomes other than to compute the mean of the distribution. One of the most popular downside risk measures is the semivariance.
Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 101). Wiley. Edición de Kindle.
