2012 CFAI Mock - Var Question

Here confusion is definition of “risk budget”. See Glossary it says “the desired total quantity of risk: the result of risk budgeting”. So I’m with CPK’s argument. It is not relative (var/capital). That was my choice in the mock!
 
A. Item set text says risk budget considers allocation of both capital and daily VAR. Using those, the two desks don’t have the same budget. I think CFAI text says risk budget = VAR, but that’s probably when you’re not given any other info.
B. Low correlations between groups gives us a VAR for the firm that’s less than the VAR when summing each group up. So, possible answer.
C. Also seems correct based on returns on allocated capital (.125 vs. .15). This would probably be the answer (or as good of an answer as B) if it said “the fixed income desk generatED better returns on its allocated capital given its VAR”. Saying it “generates” is like saying the past predicts futures returns. It doesn’t. Saying it does means you probably exhibited representative bias, right?
My 2 cents on the riddles that are the exam.
 
mcap11 is correct about A . Pl Read carefully.
Budget = VAR/Capital . VAR same but capital different
 
You must log in or register to reply here.
Back
Top