This is a Bad Idea, Let's Read About a Better One

[DiceToThat]

If this sounds like a song you've heard before, you can skip ahead to the bridge where it gets broken down:

It's a Wednesday, none of your friends feel like going out drinking so you're like "Ffffffffffine, I'll study tonight instead." You start reading Chapter 8 of Risk Management where they go through the whole way CreditMetrics works and how it basically ignores or oversimplifies the complex problem of correlation between different assets, uses VaR to determine exposure, and predicates the entire migration on one-size-fits-all historical behavior. You think to yourself, "Wow, I don't know how I'd measure credit risk, but it probably wouldn't be this monkey idiot way." Lo and behold, the FIRST PARAGRAPH of the next chapter goes:

"The CreditMetrics approach to measuring credit risk, as described in Chapter 8, is rather appealing as a methodology. Unfortunately, it has a major weakness: reliance on ratings transition probabilities that are based on average historical frequencies of defaults and credit migrations."

BRIDGE: Sweet guitar solo, followed by:

This is but one example, yet I'd like to know how valuable is it to know how to do something that is inherently flawed for this exam? I can understand a question that might go something like "List some reasons for why using CreditMetrics is stupid (2 points)" but how much effort should we put into knowing the details of a process if ultimately there is a better way to do it? I remember skipping over processes that were flawed on FETE and just knowing why they were flawed and it worked out OK. I'm wondering if I can get away with that here, as well.

[stochasticguy]

I don't think you can alway get away with this. Look at the past APM exam questions. Some of them do ask you to do detailed calculation. For the sole purpose of passing the exam, I think we need to be prepared.

No offense. But I disagree with you on this topic. Should we get rid of Black-Scholes formula in FETE because it also has a bunch of unrealistic assumptions? Of course not, as you probably remember, B-S appeared on the almost each exam. It's important to know the old approach, its flaws and how it has been improved. This is exactly how actuaries develop now methods. This fosters creativity.

However, as far as the exam is concerned, the syllabus is way too huge. That could be one of the reasons why you feel it is a piece of crap. I hate it too. But let's try to be positive because negativity will contribute nothing to the learning or the exam preparation.

[DiceToThat]

I don't agree that the Black-Scholes formula from FETE a very analogous to the CreditMetrics test. Black-Scholes was a foundation built from the ground-up using mathematical principles that - if you understood it and the math behind it - would be applicable (despite its flaws) in many ways. CreditMetrics is just one arbitrary way to perform a single task.

However, that is somewhat tangential to my main point. The main point is of course you can always say "Oh, you have to study everything because everything can be on the test." Well, of course everything can be on the test. However, I don't have unlimited time and patience to learn and memorize everything. Doing that is like carpet bombing to win a war. It'll work, probably, but the collateral damage to your life makes for a bit of a Pyrrhic victory. Plus we have March Madness and baseball season starting soon, and I like to maintain a healthy relationship with the world and Chase Utley.

The goal of studying, I would argue, is not to simply memorize everything. That is ludicrously time consuming and, depending on the level of understanding required by the question, arguably not that helpful. What I *do* think the point of studying is is being able to round out your knowledge of all the learning objectives and to qualitatively understand the larger topics. Building up a list of specifics, tables, lists and equations should follow. When I asked about knowing CreditMetrics inside and out, what I wanted to know is "Is this a larger topic that requires my general understanding" or "Is this some small piece of trivia that might be worth a point since ultimately it is not all that practical." I think that is a valid question to ask about any article or chapter we read, and I think it can better focus one's study efforts on understanding first and memorizing later.

[limabeanactuary]

There are the exams, and there is real life.

Do not confuse the two.

I tell my seminar students that I would be happy to talk with them about doing some of this stuff in real life [or not doing it]....AFTER the exam.

[PAK]

Originally Posted by limabeanactuary

....AFTER the exam.