Topics 11-14 Flashcards
Calculate, compare, and evaluate the Treynor measure, the Sharpe measure, and Jensen`s alpha
Relationship between the Treynor measure, the Sharpe measure, and Jensen`s alpha
Extensions to Jensen`s Alpha
One reference would be the required return based on the CML. The manager has created a portfolio with risk σp , which then has a reference return equal to E(Rreference) as given by the equation:
Compute and interpret tracking error, the information ratio, and the Sortino ratio
Describe the inputs, including factor betas, to a multifactor model
The number of factors to include in a factor model should be as small as possible, yet still capture the priced sources of nondiversifiable (or systematic) risk.
The Law of One Price
According to the Law of One Price, identical assets selling in different locations should be priced identically in the different locations.
The Single-Factor Security Market Line
Describe and apply the APT model
The Fama-French Three-Factor Model
Explain the potential benefits of having effective risk data aggregation and reporting
According to the Basel Committee on Banking Supervision, risk data aggregation means “defining, gathering and processing risk data according to the bank’s risk reporting requirements to enable the bank to measure its performance against its risk tolerance appetite.”
Principle 1 (Principles for Effective Risk Data Aggregation and Risk Reporting)
The governance principle (Principle 1) suggests that risk data aggregation should be part of the bank’s overall risk management framework. The board and senior management should assure that adequate resources are devoted to risk data aggregation and reporting.
Principle 2 (Principles for Effective Risk Data Aggregation and Risk Reporting)
The data architecture and IT infrastructure principle (Principle 2) states that a bank should design, build, and maintain data architecture and IT infrastructure which fully supports its risk data aggregation capabilities and risk reporting practices not only in normal times but also during times of stress or crisis, while still meeting the other principles. It stresses that banks should devote considerable financial and human resources to risk data aggregation and reporting.
Principles 3-6 (Principles for Effective Risk Data Aggregation and Risk Reporting)
Principles 3—6 specify standards and requirements for effective risk data aggregation. Banks should ensure that the data is accurate and has integrity (Principle 3), is complete (Principle 4), is timely (Principle 5), and is adaptable to the end user (Principle 6).
In addition, the bank should not have high standards for one principle at the expense of another. Aggregated risk data should exhibit all of the features together, not in isolation.
Principles 7-11 (Principles for Effective Risk Data Aggregation and Risk Reporting)
Principles 7—11 specify standards and requirements for effective risk reporting practices.
Risk reports should be accurate (Principle 7), comprehensive (Principle 8), and clear and useful (Principle 9). Principle 10 states that reports should be “appropriately frequent” (i.e., frequency depends on the role of the recipient— board members need reports less frequently than risk committee members).
Reports should be distributed to relevant parties in a timely fashion while maintaining confidentially (Principle 11).
The Code of Conduct
The Code of Conduct stresses ethical behavior in two areas:
- Principles and
- Professional Standards.
The Principles section addresses:
- professional integrity and ethical conduct,
- conflicts of interest, and
- confidentiality.
The Professional Standards section addresses:
- fundamental responsibilities and
- adherence to generally accepted practices in risk management.
Professional Integrity and Ethical Conduct
Conflict of Interest
Confidentiality
Fundamental Responsibilities
Best Practices
