Portfolio Risk: Analytical Methods
After completing this reading, you should be able to: Define, calculate, and distinguish between the following portfolio VaR measures: individual VaR, incremental VaR, marginal VaR, component VaR, undiversified portfolio VaR, and diversified portfolio VaR. Explain the role of correlation on…
The Evolution of Short Rates and the Shape of the Term Structure
After completing this reading, you should be able to: Explain the role of interest rate expectations in determining the shape of the term structure. Apply a risk-neutral interest rate tree to assess the effect of volatility on the shape of…
Empirical Approaches to Risk Metrics and Hedging
After completing this reading, you should be able to: Explain the drawbacks to using a DV01-neutral hedge for a bond position. Describe a regression hedge and explain how it can improve a standard DV01-neutral hedge. Calculate the regression hedge adjustment…
Hypothesis Tests and Confidence Intervals in Multiple Regression
After completing this reading you should be able to: Construct, apply, and interpret hypothesis tests and confidence intervals for a single coefficient in a multiple regression. Construct, apply, and interpret joint hypothesis tests and confidence intervals for multiple coefficients in…
Modeling Cycles: MA, AR, and ARMA Models
After completing this reading you should be able to: Describe the properties of the first-order moving average (MA(1)) process, and distinguish between autoregressive representation and moving average representation. Describe the properties of a general finite-order process of order \(q\) (MA(\(q\)))…
OpRisk Data and Governance
After completing this reading, you should be able to: Describe the seven Basel II event risk categories and identify examples of operational risk events in each category. Summarize the process of collecting and reporting internal operational loss data, including the…
Multifactor Models of Risk-Adjusted Asset Returns
After completing this reading, you should be able to: Explain the arbitrage pricing theory (APT), describe its assumptions, and compare the APT to the CAPM. Describe the inputs (including factor betas) to a multifactor model and explain the challenges of using…
Statistical Correlation Models – Application to Finance
There are three popular correlation models that are statistical which we seek to discuss in this chapter. These models are: Spearman rank correlation. Pearson correlation measure. Kendall \(\tau \). Two or more variables usually have a degree of association that…
Modeling and Forecasting Seasonality
After completing this reading you should be able to: Describe the sources of seasonality and how to deal with it in time series analysis. Explain how to use regression analysis to model seasonality. Explain how to construct an h-step-ahead point…
Understanding the Securitization of Subprime Mortgage Credit
After completing this reading, you should be able to: Explain the subprime mortgage credit securitization process in the United States. Identify and describe key frictions in subprime mortgage securitization and assess the relative contribution of each factor to the subprime…
