Q.3274 Quantitative Analysis

There is a 90% chance of having a sunny day on each of next 7 days. What is the probability that there will be exactly 3 sunny days in the next 7 days? A 0.9 B 0.00255 C 0.0625 D 0.00125 The correct answer is: B P(3) = 7!/((7-3)!*3!)*0.93*(1-0.9)7-3 = 0.00255 *User Question: Terribly worded question. There is a 90% chance of having a sunny day on each of next 7 days implies that there's a 90% probability of getting 7 sunny days in a row. ?

FRM Part 1

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Q.3036 Market Risk Measurement and Management

What would be the 95% parametric VaR of a portfolio made of two independently normally distributed stocks - A and B, with A⁓N(0.5,1) and B⁓N(3,15). Assume that P=(A+B) A 56×P B 4.87×P C 6.58×P D None of the above The correct answer is: C Assuming (A+B), then P~N(3.5,16). As a result, the parametric VaR95% (P) = 1.645 × √16 × P = 6.58 × P *User Question: Why isn't the mean substracted here? ?

FRM Part 1

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Q.138 Foundations of Risk Management

Define Securitization in the context of mortgage facilities A The process of dividing mortgages into several categories depending on their level of risk of default B The process of taking an illiquid asset and transforming it into a liquid financial asset C The process of combining mortgages into one large pool to form a mortgage-backed security that can be sold to third parties D The process of combining several assets to form a large pool of collateral for a mortgage facility The correct answer is: C Securitization entails pooling of mortgages into a large pool that can then be subdivided into parts sellable to investors as financial instruments. By selling the resulting mortgage-backed security, the lender can transfer risks to the market. *User Question: Though neither A or C is a perfect answer, I can't understand why C is better than A. Is this a type of question that we will see during the real exam? that will be very confusing. ?

FRM Part 1

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Q.2599 Cost of Capital

A pharmaceutical company has raised equity capital of $500 million to introduce a new drug that can make patients immune from air pollution-related allergies. The drug is expected to generate cash inflows of $90 million for each of the next 8 years. Assuming that the company's cost of capital is 6.5%, and flotation costs are 6%, then the Net Present Value (NPV) of the new drug project is closest to: A -$8.92 million. B $47.99 million. C $17.99 million. The correct answer is: C) As new drug-related project is fully financed by equity capital, the flotation costs of the common equity = Common equity * Flotation cost = $500 million * 6% = $30 millionWe can calculate the NPV of the project after adjusting this initial cash outlay for flotation costs. NPV of the project can be calculated using the financial calculator as CF0=-$530 million; CF1=90 million; F=8; I=6.5%; CPT => NPV = $17.99 million. *User Question: Shouldn't you deduct flotation costs from the equity capital raised? 500 mil- 30 mil= 470 mil CF0: -470 mil instead of 530 mil ?

CFA Level 1

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Q.1543 Market Risk Measurement and Management

Before making any investment in a single asset or a portfolio, an investor goes through some important measures to analyse the performance, returns and risks of that particular financial asset. Standard deviation, correlation risk, and return/risk are some of them. The higher the correlation of assets in the portfolio, the higher the risk that they will default together. What is the interpretation for standard deviation and return/risk of the portfolio, respectively? A The higher the standard deviation, the lower the risk is; the higher the return/risk, the more attractive the investment is B The higher the standard deviation, the higher the risk is; the higher the return/risk, the less attractive the investment is C The lower the standard deviation, the higher the risk is; the lower the return/risk, the more attractive the investment is D The higher the standard deviation, the higher the risk is; the higher the return/risk, the more attractive the investment is The correct answer is: D A higher standard deviation leads to a higher risk for an asset or a portfolio. The higher the value of this measure, the higher the returns will be with respect to risk. In fact, the standard deviation measures an asset’s volatility. *User Question: This question was fairly simple, which touch base the concepts from FRM level 1. ?

FRM Part 1

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Q.138 Foundations of Risk Management

Define Securitization in the context of mortgage facilities A The process of dividing mortgages into several categories depending on their level of risk of default B The process of taking an illiquid asset and transforming it into a liquid financial asset C The process of combining mortgages into one large pool to form a mortgage-backed security that can be sold to third parties D The process of combining several assets to form a large pool of collateral for a mortgage facility The correct answer is: C Securitization entails pooling of mortgages into a large pool that can then be subdivided into parts sellable to investors as financial instruments. By selling the resulting mortgage-backed security, the lender can transfer risks to the market. *User Question: Though neither A or C is a perfect answer, I can't understand why C is better than A. Is this a type of question that we will see during the real exam? that will be very confusing. ?

Q.661 Financial Markets and Products

Matt Christian is a former equity trader who has recently lost his job due to the rise of algorithmic trading. Christian is aiming to change his focus from equity trading to fixed income assets trading. He regularly educates himself by taking online seminars on fixed income assets and using demo accounts to trade bonds. In one of the online seminar, he read following definitions of duration: I. The duration of a bond entails the average time it takes the holder to receive cash flows on the bond; it is suitable to measure if the yield on a bond is continuously compounding. II. Modified duration is a similar measure to duration but it is more suitable when the yield on the bond is not continuously compounded. III. Dollar duration is defined as the duration multiplied by the price of the bond. Which of the statements that he learned during his seminar is/are inaccurate? A The definition of duration is inaccurate B The definition of modified duration is inaccurate C The definition of dollar duration is inaccurate D More than one definition is inaccurate The correct answer is: C Dollar duration is not defined as the product of duration and the price of the bond, but it is the product of the modified duration and the price of the bond. The definition of duration is accurate because the duration of a bond entails the average time it takes the holder to receive cash flows on the bond; it is suitable to measure if the yield on a bond is continuously compounding. The definition of modified duration is accurate as it is used when the yield on the bond is not continuously compounded. *User Question: Duration= if yield contiuously compounded Modified duration = if yield not continously compounded Dollar duration = modified duration * price of the bond ?

Cost of carry

Hi guys. Can someone please explain what cost of carry entails in futures contracts. Thanks, Wilson,

Q.2599 Cost of Capital

A pharmaceutical company has raised equity capital of $500 million to introduce a new drug that can make patients immune from air pollution-related allergies. The drug is expected to generate cash inflows of $90 million for each of the next 8 years. Assuming that the company's cost of capital is 6.5%, and flotation costs are 6%, then the Net Present Value (NPV) of the new drug project is closest to: A -$8.92 million. B $47.99 million. C $17.99 million. The correct answer is: C) As new drug-related project is fully financed by equity capital, the flotation costs of the common equity = Common equity * Flotation cost = $500 million * 6% = $30 millionWe can calculate the NPV of the project after adjusting this initial cash outlay for flotation costs. NPV of the project can be calculated using the financial calculator as CF0=-$530 million; CF1=90 million; F=8; I=6.5%; CPT => NPV = $17.99 million. *User Question: Shouldn't you deduct flotation costs from the equity capital raised? 500 mil- 30 mil= 470 mil CF0: -470 mil instead of 530 mil ?

Credit value at risk, worst case default rate

Hi, Can someone please help me break down the following question. BYJ commercial bank has $100 million of retail exposures. The 1-year probability of default averages 2% and the recovery rate averages 60%. If the correlation parameter is estimated at 0.1, what will be the 1-year 99.9% credit VaR?  Thanks in advance, Wilson