Estimated reading time: 2 minutes
Introduction
We present the formulas for the Market Risk Measurement and Management segment.
You may download this free of charge in PDF format on our website.
Click here to visit our shop page.
Value at Risk, VaR
VaR = −μ + ( σ * Zscore )
or
VaR = μ − ( σ * Zscore )
Sharpe Ratio
= (Rp – Rf) / σp
Where:
Rp Portfolio Return
Rf Treasury-Bill Returns (or the Risk-Free Rate)
σp Portfolio Standard Deviation of Return
Sortino Ratio
= (Return on Portfolio – Minimum Accepted Return) / (Standard Deviation of Returns Below Minimum Accepted Return)
Treynor Measure
= (Return on Portfolio – Risk free rate) / Portfolio Beta
Jenson’s Alpha
= Return on Portfolio – CAPM predicted Return
Information Ratio
= (Return on Portfolio – Benchmark Return) / Tracking Error
Portfolio Beta
A portfolio’s beta using the respective weightings:
Portfolio beta = w1R1 + w2 R2 + w3 R3
Portfolio Expected Return
= Rf + R(Rm – Rf)
Hedging Relationships
FaceR = – FN X (DV01N / DV01R) X β
Where:
N is the Core
R is the Hedge
Correlation for two assets ‘A’ and ‘B’
Correlation coefficient = CovarianceAB / [(Standard deviationA x Standard deviationB)]
Also:
Correlation coefficient = ( Coefficient of determination ) ½
Covariance for two assets ‘A’ and ‘B’
CovarianceAB = (Correlation coefficient) x [(Standard DeviationA x Standard DeviationB)]
The Vasicek Model
dr = sdW
dr = [ k * ( q – r ) * dt ] + sdw
Binomial Distribution
Binomial Distribution of Exceedances = ( x – pT ) / [ p ( 1 – p )T ] ½
Where:
T is the amount of trading days in the year
x is the amount of exceedances
Forward Pricing
P( T* + T ) = P(T*) X F( T* , T)
Summary
Thank you for reading! Please use the following links for even more help:
Success is near,
The QuestionBank Family