2012 CFAI Mock - Var Question

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mambovipi

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Q16, the answers say:
The trading desks have the same risk budget
The combined daily VAR of the trading desks is less than SEK 20m
THe fixed income desk generates better returns on it’s allocated capital given it’s var.
I now understand why the second answer is correct but how would you determine if others are correct?
Thanks
 
risk budget % would be VaR / capital
VaR return % would be profit / VaR
 
I am thinking answer 1 is inconsistent with the curriculum. 1 is right too.
Example in the Text pg 260-261
DEPARTMENT FX Fixed Income
Allocated Capital 100 200
Daily VAR 5 5
Profit 20 25
They then go on to say:
We note that the allocated daily VARs for the two business areas are the same, so each area has the same risk budget, and that the fixed-income desk generated better returns on the VAR allocation, but worse on the allocation of actual capital, than did the FX desk. (The FX desk shows a ˆ20/ˆ100 ﰃ 20% return on capital versus ˆ25/ˆ200 ﰃ 12.5% for the fixed-income desk.)
Even if the question were made “inaccurate” and re-evaluated…
Choice C is also right.
Equity has (25/200/10) = 1.25% per unit of capital per unit of VAR
Fixed income has 15/100/10 = 1.5% per unit of capital per unit of VAR -> so even there Fixed Income has outperformed.
 
for any discrepancies i think just follow the text…seems safer somehow
 
VAR is not additive, thus the answer - combined VAR is actually LESS THAN SEK 20mm
There is an example of this in the text about Goldman
 
That is not the point Andrew. All choices seem to be correct.
 
C is wrong as well
return on VaR = profit / VaR
equity = 25/10 = 2.5x.
fixed income = 15/10 = 1.5x
equity has better returns per unit of VaR
 
you are saying fixed income outperformed on VaR, i am saying that it did not, so C is wrong, thus B is the only right answer
 
mcap - what is the statement saying:
THe fixed income desk generates better returns on it’s allocated capital given it’s var.
on ALLOCATED CAPITAL given its VAR.
so it has to be (25/200/10)=1.25% vs. (15/100/10) = 1.5%
 
I agree w/ cpk on the allocated capital return. But maybe all the other returns on whatever given a certain VAR are irrelevant because you can’t put a hard # on VAR because of the diversification benefit??
 
Even if C is incorrect, what about option A. As per the CFA Text book page 260-61, same risk budget for both the desk.
Please reply if some one know the reason.
 
NOT SAME RISK BUDGET SINCE CAPITAL IS DIFFERNT
risk budget for equity is 10/200 = 5%
risk budget for fixed income is 10/100 = 10%
 
Then why in same kind of example as cpk mentioned above, in CFA Text book they mentioned same risk budget.is that statement incorrect??
 
PuneCFA, can you please point where in the book it says the same? Thanks.
 
i emailed CFAI about errata for this exam….they should put that out PRIOR to the exam so aren’t learning things that are wrong
doubt i will get a response but thought it was worth a try
good luck all
 
This is a horrible question…it’s not exactly the same as th example on P260.
As for C, I suspect it’s a typo…yes, it’s never a good idea to question CFAI. Here is my reasoning:
1) It compares FI desk with equity desk for the return on its allocated capital given its VAR.
FI is the winner, since its 15/100=15% is higher than 25/200=12.5% from equity.
2) But why would we compare this ratio? VAR is kind of capital at risk. So return on VAR makes more sense to me.(?) Then, Equity desk is the winner, since its 25/10=2.5 is higher than 15/10=1.5 from FI desk.
 
Tukku. This is given in CFA text book at pg 260-261 with example.cpk123 has mentioned that here in his post above.You can read…its bold
 
Wow, sounds like I was asking a question I shouldn’t ask. I read this thread while I was picking up my daughter, and it’s short question…it’s hard to read all in my tiny phone…we have one day left, and near the finish line. Thanks, pune. Good luck to all.
 
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