aidebaobao

drymartini Wrote:
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> 1. Please remove my doubts regarding market risk
> premium and equity risk premium once and for all.
> I still get confused even in level 3 (no hope !!
> )
>
> Ri = Rf + beta * (Rm - Rf)
>
> I thought (Rm - Rf) = market risk premium
> beta * (Rm - Rf) = Equity risk premium

Equity risk premium is typically not defined for a specific stock but rather for an index. If your Rm is based on a stock index (such as SP500), that Rm-Rf would be equity premium as well as market premium.

> 2. Is "investor risk tolerance is constant" for
> both Strategic asset allocation and Tactical asset
> allocation?
constant risk tolerance is an assumption that should be specified in the question. I wouldn't assume constant risk tolerance (constant risk aversion) if it's not given. Markowtiz model though assumes constant risk tolerance.

> 3. CFAI Vol 5 page 279, Problem 12.
>
> It is a monte carlo var problem. They are asking
> to calculate 5% annual var.
> we are provided with 40 worst returns of 700
> outcomes.
> we are also provided with expected return and
> standard deviation.
>
> I thought Monte Carlo method uses the same formula
> as variance covariance method. However CFAI solves
> it using similar method as Historical method.
both methods are fine. those calculating quantiles is more accurate than estimating VaR using standard deviation as that implies normal distribution.