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SA5-2010-April-Q1-iv - RAPM

B

bdeyal89

Member
Good day,

I am reading the answer to this and I am really unsure how I would do this in an exam. The notes don't seem (as far as I can find) to help me come up with the numbers in this. Is it a bit of using any numbers or must they be 'reasonable' because I am worried how subjective this answer appears. The numbers i am questioning costs=1% and "markets may rise/fall by 30% in 30 days". Any help would be appreciated, thanks for your time.
 
Yes - it was a strange calculation. If you search for "april 2010" you will find another thread where I have had a conversation with Ivanhoe about the same issue. I think the examiner just wanted people to make any attempt at estimating the VaR of the transction, and to use the core reading formula for RAPM. A more rigorous attempt at the bottom line might be to assume an annual volatility of 20% for the energy share portfolio, and a vol of 60% for the bank portfolio (reasonable at the time), and assume no correlation between the shares. Then the portfolio has volatility ((0.5)^2* 20%^2+(-0.5)^2*60%^2)^(1/2)= 31% pa. Using the root of time, to convert to a 30 day volatility, this is 31%/(12^0.5) = 9% over 30 days. so the RAPM would be -1%/9% = -11% ??
You question the 1% costs as well, but I am sure that the exminer just wanted any estimate of costs for this transaction (which involves short positions, so wouldnt be as cheap as a straight investment).
 
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