Investment risk

Question 1

What is the difference between correlation and beta

Answer 1

Correlation is if they are related and beta measures the magnitude of their moves relative to one another

Question 2

Correlation measures range from what to what

Answer 2

It ranges from -1 to 1, where:

1 indicates a perfect positive linear relationship,

-1 indicates a perfect negative linear relationship, and

0 indicates no linear relationship.

Question 3

how is beta calculated

Answer 3

Beta is calculated by regressing the returns of a security or portfolio against the returns of a market index (e.g., S&P 500). The slope of this regression line represents the beta.

Question 4

What is VaR

Answer 4

The maximum loss the portfolio might experience within a specific time frame and confidence level.

Question 5

What is Sharpe Ratio

Answer 5

The return of a portfolio versus the risk free rate. Sharpe Ratio measures the risk-adjusted return of an investment or portfolio by comparing the excess return (return above the risk-free rate) to the volatility of returns.

Question 6

what is the difference between sharpe ratio and information ratio

Answer 6

Sharpe is vs risk free return and information ratio is vs a benchmark

Question 7

What is the definition of Volatility

Answer 7

The extent to which the returns of the portfolio deviate from the average return.

Question 8

How do you calculate volatility

Answer 8

Calculate the standard deviation of the portfolio’s historical returns to assess its volatility.

Question 9

How do you measure downside capture in a portfolio of stocks

Answer 9

Step 1: Calculate the excess return of the portfolio and the benchmark during periods of negative benchmark returns (downside).

Step 2: Divide the portfolio’s excess return by the benchmark’s excess return during these periods.

Step 3: Multiply the result by 100 to express the downside capture as a percentage.

Question 10

How do you interpret downside capture in a portfolio of stocks

Answer 10

A downside capture of less than 100% indicates that the portfolio tends to lose less than the benchmark during downturns, which is generally desirable for risk management. Conversely, a downside capture greater than 100% means the portfolio loses more than the benchmark during downturns.

Question 11

what is the difference between correlation and covariance

Answer 11

Covariance measures how two variables change together, while correlation measures how closely two variables are related

Question 12

What is a good sharpe ratio

Answer 12

A Sharpe ratio greater than 1 is considered acceptable, while ratios above 2 are often seen as very good.

Question 13

What is a good value for an information ratio

Answer 13

greater than 0 is considered favorable, as it indicates that the portfolio is outperforming the benchmark on a risk-adjusted basis. Ratios above 0.5 or 1 are often considered strong

Question 14

What is a p-value

Answer 14

indicates the significance of the observed differences

Question 15

What is a signifcatn P-value

Answer 15

If the p-value is less than the chosen significance level (α), typically 0.05, it is considered statistically significant.

This suggests that the observed result is unlikely to have occurred by chance alone if the null hypothesis is true. In this case, the null hypothesis is often rejected in favor of an alternative hypothesis.

If the p-value is greater than the chosen significance level, it is not statistically significant.
This means that the observed result is likely to have occurred by chance, and there is insufficient evidence to reject the null hypothesis.

Question 16

What is DV01

Answer 16

It represents the dollar change in the bond’s price for a one-basis-point change in yield

Question 17

define Modified Duration

Answer 17

Modified duration is a measure of the percentage change in the price of a bond for a one percentage point change in yield. It is derived from Macaulay duration

Question 18

what is Macaulay duration

Answer 18

Measured in years. It is a weighted average of the times until each payment (coupon and principal) is received, with the weights proportional to the present value of the payments. It provides a measure of the bond’s effective maturity or the bond’s sensitivity to changes in interest

Question 19

What is a yield curve

Answer 19

A chart the yield of bonds with similar credit quality but differing maturities

Question 20

Name 3 popular risk systems

Answer 20

Blackrock Alladdin
MSCI Barra
Bloomberg Port

Question 21

What do beta values indicate

Answer 21

Beta = 1: Indicates that the stock’s price moves exactly in line with the market.

Beta > 1: The stock is more volatile than the market. For example, a beta of 1.5 suggests that the stock is 50% more volatile than the market.

Beta < 1: The stock is less volatile than the market. A beta of 0.5 means the stock is 50% less volatile.

Beta = 0: Implies no correlation with the market movements.

Negative Beta: It’s possible but rare, indicating an inverse relationship to the market.
Most stocks have betas between 0 and 31.

Question 22

What are the 4 measures of the Karnosky Singer attribution method

Answer 22

Currency - This measures the impact of the investor’s decisions to allocate assets across different currencies. It quantifies how much of the portfolio’s return can be attributed to currency selection and exchange rate movements.

Market Allocation - The contribution of the investor’s allocation decisions across various markets or countries. It isolates the impact of choosing specific geographic markets or sectors on the overall portfolio performance.

Security Selection -

Interaction Effect: - combined effect of market allocation and security selection

Question 23

Contrast Brinson-Fachler to Karnosky Singer

Answer 23

Currency is the main difference.

Karnosky-Singer: Explicitly accounts for the impact of currency allocation and exchange rate movements.

Brinson-Fachler: Assumes a single currency environment and does not account for currency effects.

Question 24

Is how is the systematic return of a stock calculated

Answer 24

Beta × market return

Question 25

How is the return of a stock calculated

Answer 25

Return equals beta times market plus alpha or intercept + noise or idiosyncratic return

Question 26

Estimating alpha is the job of who

Answer 26

The fundamental investor

Question 27

Estimating alpha is the job of who

Answer 27

The fundamental investor

Question 28

Estimating beta and identifying correct benchmarks is the job of

Answer 28

The quantitative risk manager

Question 29

Name three sources of market sentiment and analysis

Answer 29

The conference boards consumer confidence index

The university of michigan’s survey of consumers

The purchasing managers index