CFA CFA Level 3 CFAI Mock A PM – Li (Question 3)

CFAI Mock A PM – Li (Question 3)

  • This topic has 5 replies, 3 voices, and was last updated Oct-17 by Alta12.
  • Author
    Posts
    • Alta12
      Participant
      Up
      1
      Down

      @ravivooda @vincentt

      Hi guys. I don’t quite understand why VAR for SCIRP is being substituted in the multi-factor variance formula to find VAR of error term.

      Is there an assumption I’m missing between SCIRP and CCIRP & TELIRP? What is the relation between these three indices?

    • RaviVooda
      Participant
      Up
      4
      Down

      Can you post the question please. @alta12

    • Alta12
      Participant
      Up
      5
      Down

      The Smart Card Index (SCI) risk premium, equal to the SCI return minus the risk-free rate, denoted SCIRP is used as the dependent variable in a 2 factor regression in which the independent variables are index returns minus the risk-free rate for the consumer credit industry (CCIRP) and the telecommunication industry (TELIRP). The regression results:

      SCIRP: Mean 5.4% VAR 0.2704
      CCRIP: Mean 4.6% VAR 0.0784
      TELIRP: Mean 2.8% VAR 0.1024

      Regression co-efficient: a = 0.011 b (CCIRP) = 1.02 b (TELIRP) = 1.045

      Q: Based on the correlation of 0.25 that the team believes to exist between CCIRP and TELIRP, the new volatility is closest to?

      A:56.4%

    • vincentt
      Participant
      Up
      0
      Down

      Hi @alta12 the formula for VaR requires the return which is not given here. Plus because this is a regression so you have to use the formula given.

      In schweser there’s a note saying to memorise that formula only if you have the time otherwise it’s negligible.

    • RaviVooda
      Participant
      Up
      5
      Down

      @alta12, the question says that SCRIP is a dependant variable. So it is depending on CCRIP and TELIRP. These are the independent ones.

    • Alta12
      Participant
      Up
      2
      Down

      Thanks. Got it!

Viewing 5 reply threads
  • You must be logged in to reply to this topic.