1

3.A

3. B

3. C

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IN EWMA model always remember the following formula for new estimation of s

Decay Factor * (Std Deviation)^2 + (1-decay factor)(Todays stock market Returns)

Note that both Decay & Deviation are starting from D and would stay togather &

Garch Model new std deviation

Omega + STD Deviation * Alpha + todays returns * Beta

Note that todays returns come with beta here

Garch model -----> o , sad tb ( o --stands for omega ; std deviation * alpha ; todays returns * beta)

Measures of Performance Treynor Ratio ; Sharpe Ratio ; Jensens Alpha

Note that Treynor ratio is Risk Premiuim / Beta (systematic risk) or [ E(Rp)-Rf]/Bp

or remember TB as beta is always in denominator

Sharpe Ratio is same as Treynor Ratio but here we use standard devia
Sharpe Ratio = [ E ( Rp ) - Rf] / Std Dev of portfolio

Jensons Alpha / Alpha is assets excess return over return predicted by CAPM
Alpha = Exp Ret portfolio - [ Rf ret + Beta (Exp Ret Market -Rf Ret)] …. (We are
to it !)
Sharpe Ratio can be applied to all portfolios b/c it uses total risk ; Treynor ratio is used only fo
Jensons alpha is used for portfolios that have same Beta
Sharpe Ratio is considered good for historical performance where as Treynor Ratios is considered mor

Also Treynor Ratio = Alpha of portfolio ie Exp (Ret of portfolio ) - Risk free returns
Beta of Portfolio
a treyner ratio > market treynor ratio genrates +ve Alpha ; Low diversification results in higher Std D
Beta Is Quantity of Risk taken ( remember BenQ computers ) & Market risk Premium ( Exp Ret portfoli

Information Ratio = Alpha of portfolio / Tracking error of portfolio ( tracking error is std deviation of m
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Financial Disasters : Theory Major cases

Drysdale Securities & Chase Manhattan Bank

1976 Drysdale Sec could borrow $300 Million In unsecured Funds From Chase Manhattan Bank.
Given The amount ; the Drsdale took significant exposure in Bond market which declined in value
Drysdale could borrow huge funds on bonds because in order to save time it was allowed to value
Securities with accrued interest .

Kidder Peabody misrepresented facts by exploiting shortcoming of cumpter system which could calculate present value of
forward contracts. The system failed to realize that profits shall evaporate once financing costs of cash bonds were taken in account

Nick Lesson , British Barrings Junior trader was mailnly using straddle strategy to hide his pervious losses.
in 1994 Nick Lesson lost $ 296 Million ; but showed profit of $46 million. He was able to still trade b/c he
received $345 million from london office b/c they think Nick's starategy of going long -short on market
is definitely risk free while Nick lesson was going LONG_LONG on both the exhanges and thus getting in to
bigger losses. Also since Nick Lesson was both Floor manager of SIMEX & manager in charge of settlement operations
both positions helped him hide significant losses which resulted him to take higher risk in order to recover
presvious losses.