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FRM Level 2 Formulas – Risk Management and Investment Management

Estimated reading time: 1 minute

 

Introduction

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

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Risk Aversion

lA =  IR  / ( 2 yP )

Where:

IR is the Information Ratio

yP  is the Portfolio’s Active Risk

 

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

 

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

 

Summary

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