Hey Fabian - just want to double check for the segmentation bit, do we use the "segmented market sharpe ratio"? In the Schweser's note, it uses GIM sharpe ratio...so want to double confirm here.. Thanks!
If the question provides a segmented market sharpe ratio, then you should use it for the risk premium computation under complete segmentation. GIM Sharpe ratio used for perfect integration.
@@FabianMoa to build on this, if we are told that the mkt is perfectly integrated with world market (EOC #4) we should use the GIM sharpe ratio for the segmented RP calc. if we are not told this, and given a segmented RP, we should use the segmented RP?
Hi Brendan, in EOC#4, the statement "Assume that the Swiss market is perfectly integrated with the world markets." tells us that the degree of perfect integration = 100% (in other words, the degree of complete segmentation = 0%). So the solution only shows the calculation of the risk premium under perfect integration, where the Sharpe ratio of the GIM is used. If we were told that "Swiss market is 60% integrated with world markets", then we would have to calculate the RP of the asset class under complete segmentation. For this part: 1) if you were only given the GIM Sharpe ratio, then RP(i, complete segmentation) = SD(i) x 1 x GIM Sharpe ratio. 2) If you were given both GIM Sharpe ratio and Segmented Market Sharpe ratio, then RP(i, complete segmentation) = SD(i) x 1 x Segmented Market Sharpe ratio.
@@FabianMoa following up on this (from 2 months ago), if complete integration is used, why do we use the segmented std deviation and not the GIM std deviation?
@@FabianMoa Don't think this is right; differs from the CFA practice questions I've done, and Kaplan Schweser study guide; probs because of the "Professor's Note" they include after the example: "Theoretically, a fully segemented market's Sharpe ratio would be independent of the world market Sharpe. However, CFA text simplifies assuming world market Sharpe ratio in both segemented and integrated calculations. [this after their example provides both market and global market sharpe] This is a reasonable assumption as we are valuing partially integrated/segemented markets. There is no reason to analyze the fully segmented market as outsiders CANNOT, by definition, invest in such markets." Might wanna check CFA text again...? Also thanks a million for the vids!!!
Great videos - really love your work. Make some of these concepts so much easier to understand than CFA!
Great explanation - Thanks!
Glad it was helpful!
Another great video - thanks Fabian!
If we're also assuming complete integration with global markets, then how is the correlation 0.90? Should it not be 1 if its completely integrated?
Excellent
Thank you! Cheers!
Thanks Fabian
You're welcome!
Which index should be used for global market portfolio?
An example is the MSCI World Index
Hey Fabian - just want to double check for the segmentation bit, do we use the "segmented market sharpe ratio"? In the Schweser's note, it uses GIM sharpe ratio...so want to double confirm here.. Thanks!
If the question provides a segmented market sharpe ratio, then you should use it for the risk premium computation under complete segmentation. GIM Sharpe ratio used for perfect integration.
@@FabianMoa to build on this, if we are told that the mkt is perfectly integrated with world market (EOC #4) we should use the GIM sharpe ratio for the segmented RP calc. if we are not told this, and given a segmented RP, we should use the segmented RP?
Hi Brendan, in EOC#4, the statement "Assume that the Swiss market is perfectly integrated with the world markets." tells us that the degree of perfect integration = 100% (in other words, the degree of complete segmentation = 0%). So the solution only shows the calculation of the risk premium under perfect integration, where the Sharpe ratio of the GIM is used.
If we were told that "Swiss market is 60% integrated with world markets", then we would have to calculate the RP of the asset class under complete segmentation. For this part:
1) if you were only given the GIM Sharpe ratio, then RP(i, complete segmentation) = SD(i) x 1 x GIM Sharpe ratio.
2) If you were given both GIM Sharpe ratio and Segmented Market Sharpe ratio, then RP(i, complete segmentation) = SD(i) x 1 x Segmented Market Sharpe ratio.
@@FabianMoa following up on this (from 2 months ago), if complete integration is used, why do we use the segmented std deviation and not the GIM std deviation?
@@FabianMoa Don't think this is right; differs from the CFA practice questions I've done, and Kaplan Schweser study guide; probs because of the "Professor's Note" they include after the example:
"Theoretically, a fully segemented market's Sharpe ratio would be independent of the world market Sharpe. However, CFA text simplifies assuming world market Sharpe ratio in both segemented and integrated calculations. [this after their example provides both market and global market sharpe] This is a reasonable assumption as we are valuing partially integrated/segemented markets. There is no reason to analyze the fully segmented market as outsiders CANNOT, by definition, invest in such markets."
Might wanna check CFA text again...? Also thanks a million for the vids!!!
hi Fabian, shouldn't the stdev be used instead of volatility? (so the square root of 23%)
The volatility is the standard deviation
absolutely, sorry was thinking about Variance, my bad
thanks for the videos