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CFAI Mock A PM – Li (Question 3)

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    • Avatar of Alta12Alta12
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        23 Oct 2017 at 3:24 pm
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        @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?

      • Avatar of RaviVoodaRaviVooda
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          • CFA Level 3
          23 Oct 2017 at 3:30 pm
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          Can you post the question please. @alta12

        • Avatar of Alta12Alta12
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            23 Oct 2017 at 3:35 pm
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            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%

          • Avatar of vincenttvincentt
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              • CFA Level 3
              23 Oct 2017 at 4:16 pm
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              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.

            • Avatar of RaviVoodaRaviVooda
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                • CFA Level 3
                23 Oct 2017 at 4:17 pm
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                @alta12, the question says that SCRIP is a dependant variable. So it is depending on CCRIP and TELIRP. These are the independent ones.

              • Avatar of Alta12Alta12
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                  23 Oct 2017 at 4:18 pm
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                  Thanks. Got it!

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