FRM Level 2 Formulas – Risk Management and Investment Management

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We present the formulas for the Risk Management and Investment Management segment.

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Risk Aversion

lA =  IR  / ( 2 yP )


IR is the Information Ratio

yP  is the Portfolio’s Active Risk


Sharpe Ratio

= (Rp – Rf) / σp


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


Information Ratio

=  Information Coefficient *  ( Number of Forecasts ½  )


Marginal Contribution to Value Added ( MCVA )

MCVA  =  an  – 2 la  *  y  *   Marginal Contribution to Active Risk

MCVA  =  an  – 2 la  *  y  *   MCAR



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