why are these 2 correct? different, potential, correct, equity, income

Colum

1) because two portfolios can have different maturity structure (i.e. bullet vs. barbell) and interest rates volatilities are different at different maturity.

2)underperformance is calculated using risk adjusted return. If a portfolio has low beta, and it earns less than FTSE, it is not underperformance.

Carson

1) 2 fixed income portfolio could have identical durations and substantially different VAR
2) beta does not measure the potential underperformance of our equity portfolio compared with FTSE all share index

Chuckrox

They could also be from different sectors e.g the way mortgage securities will react to interest rate change will be different from the way a putable call option will react = different VAR.

lcw77

maisatomai Wrote:
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> 1) 2 fixed income portfolio could have identical
> durations and substantially different VAR
> 2) beta does not measure the potential
> underperformance of our equity portfolio compared
> with FTSE all share index

Duration only measures interest rate risk. The portfolios could exhibit the same duration but have drastically different credit quality which would result in different VAR measures.

canadiananalyst

For #2, also beta is a historical measure and thus is not a measure of potential (forward-looking) under or outperformance. Past performance is no guarantee of future results.

Windjam

It is debatable if VAR can be even used in asymmetric strategies ( i.e. with embedded options). VAR depends on the returns being normally distributed