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Copyrighted Material JWBK558-bind JWBK558-Bacon Printer: Yet to Come September 5, 2012 17:27 Trim: 229mm × 152mm Index 9/11 terrorist attacks 186 appendices 193–202 appraisal ratio 86–7, 165 Abdulali, Adil 37 arbitrage 181–2 absolute mean difference 12, 14 arithmetic information ratio 55–61 absolute risk dashboard 180, 195–8 arithmetic mean 7–8, 45–6, 191 active risk see tracking error arithmetic tracking error 53–4, 55–67 adjusted information ratio 61–3 asset allocation decisions, portfolio adjusted M2 160–1, 168, 179–80 managers 73, 78 adjusted Sharpe ratio (ASR) 48–9, 52, asset managers 2, 3, 57, 164, 183–7 160–1, 167, 179–80, 183, 196 Association for Investment Management AIMR see Association for Investment and Research (AIMR) 16–17 Management and Research see also CFA-Institute alpha 71–3, 74–5, 81, 83, 86–7, 90–6, asymmetrical distributions 23–4, 49, 52, 165, 168, 177–9, 189, 200–1 179–80 see also Fama-French alpha;Jensen’s see also skewness alpha; regression alpha audit 183 alternative investmentshttp://www.pbookshop.com 42, 164, 169, average drawdown 97, 100–1, 105, 165, 173–4 171, 178 alternative modified Jensen 88 average VaR see conditional VaR alternative Sharpe ratio 47–9, 52 averages 7–8 analytical VaR 122, 124 see also mean; median; mode annual arithmetic mean 8 annualised alpha COPYRIGHTED72–3, 200–1 back-tests, MATERIAL VaR 182 annualised returns 7, 8, 12, 19, 44–9, Bacon, Francis 1 56–61, 155–6, 172–4, 189, 193–4, banks 181–2 196, 197, 200 bear beta 73, 78–81 annualised risk 18, 44–9, 56–61, 127, bell curves see normal distributions 155–6, 158–60 benchmark bias ratio 41–2 annualised standard deviation 18, 19, 20, benchmark duration 150 44–9, 127 benchmark mean and variance 10–14, 71, annualised VaR 127 200–1 annualised variance 18 see also mean; variance JWBK558-bind JWBK558-Bacon Printer: Yet to Come September 5, 2012 17:27 Trim: 229mm × 152mm 210 Index benchmark returns 28, 30–42, 53–67, compliance/regulatory risk 1–2, 172–4, 69–96, 153–61, 172–4, 175, 180, 181–2, 185–6 182–7, 189–91, 199–202 conditional drawdown at risk (CDaR) 138 benchmark skewness and kurtosis 27–32, conditional Sharpe ratio 133, 166, 180, 200–1 196 see also kurtosis; skewness conditional VaR (CVaR) 130–9, 147, benchmark standard deviation 20, 166, 171, 176, 182, 189, 196 200–1 confidence levels, VaR 120–39 see also standard deviation contingency planning 185 Bera-Jarque normality test 27–8 continuously compounded (log) returns Bernardo & Ledoit ratio 110 8–9, 54, 143–4, 154–5, 189 Bessel’s correction 14–17, 24, 25–7, 30, control failures, operational risk 2 32, 92 convertible bonds 181–2 beta 71–6, 78–81, 83, 88–9, 150, 161, convexity 78, 81, 147–9, 171 165, 170, 177, 189, 201 Cornish-Fisher expansion 125 see also bear . ; bull . ; correlation; correlation 4–5, 30, 32–4, 70–1, 82–3, covariance; duration . ; regression 157–8, 170, 178–9, 189, 200, 201 beta; systematic risk; volatility counterparty risk 2, 3, 185–6 beta timing ratio 73, 78–81 coupons 141–51 see also market timing covariance 28, 30–3, 70–2, 73–6, 92–6, bias ratio 37, 40–2, 170 170, 189 bibliography 203–8 credit crisis from 2007 2, 186–7 bikini analogy, statistics 107 credit default swaps (CDSs) 187 Bismark, Otto von 181 credit risk 3, 181–2 Black October 9 September to 13 see also default . ; issuer . October 2008 186 crowded exits, liquidity risk 3 bonds 141–51, 187 cumulative covariance, K ratio 92–6 book to market ratio 90–6 CVaR see conditional VaR bull beta 73, 78–81 cynical risk controllers 187 Burke ratio 102, 105, 106, 165, 178 d ratio 110–11 Calmar ratio 100,http://www.pbookshop.com 105, 106, 165, 178, dashboards, risk measures 180, 195–8, 180, 189, 196 199–202 Capital Asset Pricing Model (CAPM) 45, data mining 171–2 71–84, 89–91 data points, required numbers 19–20, 127 see also beta; Fama-French three factor Deane Sterling Jones 101 model; Jensen’s alpha; Sharpe ratio default risk 3 Carhart four factor model 91, 168 derivatives 181–2, 187 Carhart’s alpha 91, 168 descriptive statistics 7–42, 164, 196–202 Carville, James 141 see also kurtosis; mean; skewness; cash flows, bonds 141–51 variance cash/near-cash strategies 42 Deutsche Bank 2 central limit theorem 19 differential return 72, 155–6, 168 CFA-Institute 16–17 disaster recovery plans 185 see also Association for Investment disclosures, GIPS 172–4, 190, 193–4 Management and Research discount factors, bonds 141–51 coherent risk measures 130, 180 dispersion measures of return 5, 7, 193–4 JWBK558-bind JWBK558-Bacon Printer: Yet to Come September 5, 2012 17:27 Trim: 229mm × 152mm Index 211 documented risk management processes ex-post VaR 120, 122–4, 133, 136 183–4 Excel functions 24, 27 double VaR ratio 129, 166 excess kurtosis 25–30, 132–6, 190 Dow Jones Industrial Average (DJIA) excess returns 32–5, 36–7, 51, 53–67, 186–7 71–96, 147, 154–6, 161, 165, 168, down capture indicator 34, 170 170, 177–9, 180, 200–1 down number ratio 34, 170 see also information ratio; M2 . ; down percentage ratio 35, 170 omega . ; tracking error downside information ratio 113 exotic derivatives 181–2 downside potential 108, 110, 117, 139 expected shortfall see conditional VaR downside risk 107–18, 139, 147, 158–61, exposures 1–5 168, 170, 175, 177–80, 183, 189, external risk 174 194, 196, 197, 201 extreme events 119, 186–7 downside risk Sharpe ratio 113 extreme returns 9, 20, 22–4, 27, 180 downside variance 108 extreme risk 119–39, 180, 186–7 drawdown 97–106, 138, 165–6, 171, extreme value theory 119 177–80, 189, 194 drawdown at risk (DaR) 138 false sense of security, risk measures 187 drawdown deviation 98, 105, 165, 171, Fama beta 89 178 Fama decomposition 88–90 duration 142–51, 167, 171, 190 Fama-French alpha 90–1, 168 see also Macaulay . ; modified . ; Fama-French three factor model 89–91, portfolio . ; reward to . 168 duration beta 150 Farinelli-Tibiletti ratio 115, 117, 167 duration to worst 146–7 fat tails 25–6, 27, 119, 182 see also kurtosis effective convexity 148–50 Fisher’s kurtosis see excess kurtosis effective duration 145–6, 150 Fisher’s skewness see skewness effective mean term see duration fixed income risk 141–51, 171, 187 efficient frontier 156–7 forecasts 4–5, 56–7, 163, 175–6, 185–6, Einstein, Albert 7, 119 187 equity indexes, bias ratiohttp://www.pbookshop.com 42 four factor model see Carhart... equity market fraud 2, 37, 42, 57 fat tails 27 frequencies 19–20, 56–7, 127 Hurst index/exponent 37 fund rating systems 174–5 ethics 172–4, 190 Europe gain at risk (GaR) see potential upside sovereign debt crisis 16 April to 7 May gain standard deviation 109 2010 186–7 gain-loss ratio 110, 117, 139, 201 UCITS framework 181–2 Galton, Francis 69 ex-ante (prospective) risk 4–5, 16, 53–4, Gaussian distributions see normal 56–7, 122–7, 163, 175–6, 182–3, distributions 185–6, 190 generalised Rachev ratio 137–8, 167 ex-post alpha see Jensen’s alpha generalized Z ratio 138–9, 167 ex-post (historical) risk 4–5, 7, 16, 43, geometric excess returns 53–5, 56–67, 53–4, 56–7, 122–7, 133, 136, 163–4, 154–5 172–6, 182–3, 186–7, 190 geometric information ratio 56–7, 58 JWBK558-bind JWBK558-Bacon Printer: Yet to Come September 5, 2012 17:27 Trim: 229mm × 152mm 212 Index geometrical mean 7, 9, 53–4 internal audit 183 GH1 (Graham & Harvey 1) 156, 168, internal rate of return (IRR) 141 177–9 internal risk 174, 193–4 GH2 (Graham & Harvey 2) 156–7, 160, International Monetary Fund (IMF) 186 168 investment banks 119–20, 181–2 Gini coefficient 12, 14 IRR see internal rate of return Gini mean difference see absolute mean issuer risk 3 difference Gini ratio 52–3, 167 J-Com Co. 2 GIPS see Global Investment Performance Janssen annualised standard deviation 19 Standards Jarque-Bera statistic see Bera-Jarque Global Investment Performance normality test Standards (GIPS) 172–4, 190, 193–4 Jensen’s alpha 71–6, 86–8, 165, 168, glossary 189–91 177–9, 201 Goodwin, Thomas 57 K ratio 91–6, 167 half variance 108, 112–13 see also modified . hedge funds 42, 164, 169, 170–1, 173, Kappa 113–14, 115, 167 178, 184 kurtosis 24–32, 48–9, 52, 61, 63–5, 110, histograms 22 114, 119, 125, 132–6, 160–1, 167, historical returns 4–5, 172–6, 182–3, 170, 171, 179–80, 190, 196, 200 186–7, 190 see also excess . ; fat tails; historical risk see ex-post . leptokurtosis; platykurtosis; historical/non-parametric simulation, relative . ; sample . ; VaR 124, 125–7, 182 skewness . human errors 2–3, 185–6 Hurst index/exponent 35–9, 61, 63–7, lake ratio 103, 106, 178 170, 175 Laplace 163 largest individual drawdown 98, 105, idiosyncratic risk see specific/residual 170, 178 risk legal department 183 impact analysis,http://www.pbookshop.com risk definitions 1–2 LeGuin, Ursula K. 97 income disparities, Gini coefficient 12 Lehman Brothers crisis 8 September to information, noise levels 20 18 September 2008 3, 187 information ratio 55–61, 86–7, 113, 165, leptokurtosis 25, 119 176–8, 180, 190, 200–1 Levenstein, Aaron 107 see also adjusted .
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