Term
Krep's Marginal Risk Approach Formula
(ruin theory approach) |
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Definition
V= zS-R
- V=Surplus
- S=Standard deviation of loss portfolio
- R = Return in dollars
- Z= Standard normal prob of ruin
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Term
| Krep's Calculate a marginal surplus need S1-S |
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Definition
=σ(2SC+σ)/(S1+S)
=V1-V=Z(S1-S)-r
r=return on additional risk
σ = standard deviaton of new risk
C=correlation coefficent between risk and existing |
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Term
| CAPM vs Leverage Approach |
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Definition
note that (S1-S)/p divided S/P
= Cov(x/p,L/P)/Var(L/P)
So by defination
ß = (S1-S)/p divided by S/P |
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Term
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Definition
Rm=Rf+(P/zSß)*Rp
- Rm=target return on equity
- Rp=target return on premium
- P/zSß = Leverage ratio
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Term
| (3) Bault criticisms of Feldblum CAPM |
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Definition
1)Industry Leverage Ratio - The CAPM risk load requires the use of industry leverage ratio, which is only theoretically
2)Industry Portfolio vs Company Portfolio - Should we use the company's own risk portfolio or the industry? Bault says a smaller company couldn't charge more.
3)Challenges associated with calculating betas. Calendar year data may not be appropriately on-leveled or have reserve deficiencies. |
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Term
| Industry Leverage Ratio Alturnatives (3) |
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Definition
1)Suplus from Stat Statements
2)Year end equity snapshot
3)User Selection of Leverage ratio |
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Term
| How to calculate Covariance? |
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Definition
| Very difficult, better to use some sort of proxy. |
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