Factor Theory
After completing this reading, you should be able to: Give examples of factors that impact asset prices and describe the theory of factor risk premiums. Discuss the capital asset pricing model (CAPM), its assumptions, and how factor risk is addressed in…
Parametric Approaches (II): Extreme Value
After completing this reading, you should be able to: Explain the importance and challenges of extreme values in risk management. Describe extreme value theory (EVT) and its use in risk management. Describe the peaks-over-threshold (POT) approach. Compare and contrast generalized…
The Failure Mechanics of Dealer Banks
After completing this reading, you should be able to: Compare and contrast the main lines of business in which dealer banks operate and the risk factors they encounter in each of the lines. Identify circumstances that can cause a liquidity…
Futures Markets
After completing this reading, you should be able to: Define and describe the key features and specifications of a futures contract, including the underlying asset, the contract price and size, trading volume, open interest, delivery, and limits. Explain the convergence…
Central Clearing
After completing this reading, you should be able to: Provide examples of the mechanics of a central counterparty (CCP). Describe the role of CCPs and distinguish between bilateral and centralized clearing. Describe the advantages and disadvantages of the central clearing…
Using Futures for Hedging
After completing this reading, you should be able to: Define and differentiate between short and long hedges and identify their appropriate uses. Describe the arguments for and against hedging and the potential impact of hedging on firm profitability. Define the…
Insurance Companies and Pension Plans
After completing this reading, you should be able to: Describe the key features of the various categories of insurance companies and identify the risks facing insurance companies. Describe the use of mortality tables and calculate the premium payment for a…
Future Value and Exposure
After completing this reading you should be able to: Describe and calculate the following metrics for credit exposure: expected mark-to-market, expected exposure, potential future exposure, expected positive exposure and negative exposure, effective expected positive exposure, and maximum exposure. Compare the…
Portfolio Performance Evaluation
After completing this reading, you should be able to: Differentiate between time-weighted and dollar-weighted returns of a portfolio and describe their appropriate uses. Describe and distinguish between risk-adjusted performance measures, such as Sharpe’s measure, Treynor’s measure, Jensen’s measure (Jensen’s alpha),…
Common Behavioral Biases
Mnemonic Devices for Easy Recall Cognitive: Use the following mnemonic device to remind yourself of cognitive biases: Con-Con-Con-Rep-Hind + FAMA (think Fama and French). Emotional: To remember emotional biases, use the following mnemonic device: LESSOR (the owner of an…
