April 2017 Question 1 (potential appeal)

Discussion in 'SP9' started by klar, Jul 20, 2017.

  1. klar

    klar Member

    New poster here! I would like to get thoughts on parts v and vi in question 1 regarding a potential appeal.

    v)Assess the relevance of downside risk measurement to determining risk in a bond portfolio.

    vi)Contrast the approaches used by BAM (uses 95% 1 day VAR) and LIL (uses annualized volatility), including consideration of appropriateness for the assessment of risk in a bond portfolio

    In the examiners report it says: "This question was poorly answered. Many candidates failed to recognise the relevance of the asymmetric return profile of bonds."

    A)Can someone explain this? Is it true that all bonds have an assyemtric return? Isn't that only corporate bonds where there is default risk? Would equities or risky bonds have been a better example?

    B)Was this concept discussed in the syllabus, i.e. the importance to use a downside risk measure by an assymetric return profile? did the question appear to be referring to this concept?

    C)Lastly, how would others have answered this question given the lack of clarity?

    I believe the question was unclear and I'm not sure the examiners took it into account (given how poorly answered this question was answered).

    Thank you in advance for your replies!!
     
    Last edited by a moderator: Jul 21, 2017
    klar, Jul 20, 2017
    #1
  2. Simon James

    Simon James ActEd Tutor Staff Member

    Hi - sorry you didn't quite pass this time.

    Some things for you to think about....
    - why would bonds returns be symmetric? The upside is capped at the return of the nominal and all coupons due, but the downside risk varies all the way to a complete loss of capital and coupons. Credit losses distributions tend to be skewed (See Sweeting 14.5.3).
    - government bonds do have default risk (think about the Greek government recently)
    - the company in the question invests in corporate and government bonds

    In terms of the syllabus, relevant items to look at might be:
    5.3 Analyse univariate and multivariate financial and insurance data (including asset prices, credit spreads and defaults, interest
    rates and insurance losses) using appropriate statistical methods.
    5.4 Recommend a specific choice of model based on the results of both quantitative and qualitative analysis of financial or insurance data.
    5.5 Discuss the assessment of different types of market risk.
    5.6 Evaluate credit risk:
    5.6.1 Describe what is meant by a credit spread, and describe the components of a credit spread.
    5.6.2 Discuss different approaches to modelling credit risk.

    Simon

    PS Just to be clear, I can not express any opinion on whether or not you should appeal or have grounds to do so!
     
    Simon James, Jul 21, 2017
    #2

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