2007 exam Q4, Q15, Q16, Q20?

[alagangang]

Q4 did it ever mention it's a one year swap?

Q15 Be cautious, the messy GMAB formula is not on the formula sheet.

Q16 asks you to calculate the prob(S(t2)/S(t0)<1) using RSLN. To do that you need prob(# of months spent in Regime 1) which accroding to the answer sheet is prob(0 months spent in Regime 1)=phi*0+(1−phi)*(1−P21), where phi=P21/(P12+P21)... ...
but shouldn't it be prob(0 months spent in Regime 1)=(1−phi)*(1−P21)*(1−P21)?

Q20 asks to explain the "twin shares" anomaly using behavioral finance. The answer sheet says something like shell's price is way above the relative price of royal dutch because it was included in S&P500 (and therefore in greater demand), but that to me is an efficient market explanation rather than behavioral finance?

It's a tough exam!

[alagangang]

Also Q10, the question gives mean (geometric) and standard deviation (sample std i.e. sum squared difference from the geometric mean divided by n-1) of asset return. Why is answer sheet calculating the mean and std differently?

[The Smokin' Cracktuary]

Q4 did it ever mention it's a one year swap?

Q15 Be cautious, the messy GMAB formula is not on the formula sheet.

Q16 asks you to calculate the prob(S(t2)/S(t0)<1) using RSLN. To do that you need prob(# of months spent in Regime 1) which accroding to the answer sheet is prob(0 months spent in Regime 1)=phi*0+(1−phi)*(1−P21), where phi=P21/(P12+P21)... ...
but shouldn't it be prob(0 months spent in Regime 1)=(1−phi)*(1−P21)*(1−P21)?

Q20 asks to explain the "twin shares" anomaly using behavioral finance. The answer sheet says something like shell's price is way above the relative price of royal dutch because it was included in S&P500 (and therefore in greater demand), but that to me is an efficient market explanation rather than behavioral finance?

It's a tough exam!

I honestly don't remember a lot of this, but I will be going over that exam again soon.

I do remember question number 20, and thinking it was total BS. They didn't really want you to use behavior finance to explain anything. What they wanted and what they really should have asked was....

"What did the source material say about these things from the section of the syllabus on behavior finance?"

That's what they were actually asking for anyway. For the twin shares things, most of there answer was giving an example. I fail to see how giving an example is using behavior finance to explain it.

That whole question Pi$$ed me off. I actually attempted to use the concepts from that section of the syllabus to explain those things.

But alas, I should have known better. They don't want you to apply concepts from the syllabus to things, they just want you to remember exactly what the source material said. If you actually correctly applied some of the knowledge you gained from one reading to a question written from another reading, you are pretty much screwed.

(where's the smiley with a gun to his head? That's what I need to insert here) (metaphorically speaking of course. Please don't call the boys town national hotline or anything)

[Laurelinda]

Also Q10, the question gives mean (geometric) and standard deviation (sample std i.e. sum squared difference from the geometric mean divided by n-1) of asset return. Why is answer sheet calculating the mean and std differently?

That totally annoyed me, too.

[Laurelinda]

Q4 did it ever mention it's a one year swap?

No, drat it. I guess you just have to notice that you couldn't do the problem if it wasn't, because there aren't any more LIBOR rates in the table.

Q16 asks you to calculate the prob(S(t2)/S(t0)<1) using RSLN. To do that you need prob(# of months spent in Regime 1) which accroding to the answer sheet is prob(0 months spent in Regime 1)=phi*0+(1−phi)*(1−P21), where phi=P21/(P12+P21)... ...
but shouldn't it be prob(0 months spent in Regime 1)=(1−phi)*(1−P21)*(1−P21)?

I think the answer is correct but I'm not sure. (1-pi) is the probability that you're in regime 2 in the first year, and (1-P21) is the probability that you stay there for the second year. Try not to treat Time zero as it's own time period...I made that same mistake at first.

Q20 asks to explain the "twin shares" anomaly using behavioral finance. The answer sheet says something like shell's price is way above the relative price of royal dutch because it was included in S&P500 (and therefore in greater demand), but that to me is an efficient market explanation rather than behavioral finance?

Somewhere on this syllabus I think I saw "efficient" defined as equal, universal access to information (or as if there were equal access to information). Not sure that applies to the Shell/Royal Dutch case. :shrug:

It's a tough exam!

You can say that again!!! :rimshot:

[Eroboy]

Also Q10, the question gives mean (geometric) and standard deviation (sample std i.e. sum squared difference from the geometric mean divided by n-1) of asset return. Why is answer sheet calculating the mean and std differently?

Actually, what confuses me is that the formula in the book clearly refers to the dollar amount of the surplus in the calculation. I have no idea why SOA uses % of change surplus in the calculation.

[Laurelinda]

Actually, what confuses me is that the formula in the book clearly refers to the dollar amount of the surplus in the calculation. I have no idea why SOA uses % of change surplus in the calculation.

Thank you for noticing that, too! That's been bugging me. Funny thing is, the "SOA version" makes more sense as a measurement that should be analogous to the Sharpe ratio: Excess return over volatility of return. I think I'm going to take a risk and go with that. I might even note what I'm doing.