I think it’s worth it, since it makes up almost half the syllabus and is well-written. I’d check Amazon too, see if it’s cheaper there.
Or borrow a coworker’s. It’s worth reading.
You guys put me over the edge, officially ordered a used copy of the 10th edition off Amazon. Now it’ll be a race between its estimated delivery late this month and the CAS results.
I think I found it on academia.edu or something like that. Downloaded as a .pdf, but you can print from it.
I cancelled my order, was able to get a digital copy
google this: “File:.pdf Bodie, Z Investments”
should be the first link.
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CAS released a statement about results.
https://www.casact.org/press/index.cfm?fa=viewArticle&articleID=4916
I read January 14 and got excited for no reason. 
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11th edition pdf is on sale for 19$
And it only takes 1 minute to read!
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Don’t let the CAS know!
I see lots of schedule times that are 5/6 at 8am. There’s a few places that have other times, but not very many.
I saw the same in NJ. Fortunately 8am on a Thursday is just about when I’d select regardless of choice, but was interesting the very limited options. I guess people really got in an registered early.
The description takes 1 minute. I actually downloaded it, it’s the full 1000+ pages. I used 10th edition beforw. This is the real file
Amp, do you think you’ll be posting a broad summary of each reading like you did for Exam 7?
BKM Ch 6:
- Risk averse vs Risk neutral vs Risk Lovers
- Formula for Utility function - certainty equivalent rate
- Mean-variance criterion (how to determine if a portfolio dominates another)
- Complete portfolio vs optimal risky portfolio
- Capital allocation line equation/graph (Capital market line is just CAL with passive portfolio as risky portfolio)
- Sharpe ratio (reward-to-volatility ratio)
- Optimal portfolio equation - determines how much to invest in optimal risky portfolio
- Passive vs Active strategies benefits and drawbacks
BKM Ch 7:
- Systematic vs Firm-specific risk
- Formula for standard deviation of portfolio of n equally weighted assets
- Equations for expected return and standard deviation of portfolio of two assets
- Weights for minimum variance portfolio of two assets
- Weights for optimal risky portfolio of two assets
- Understand portfolio opportunity set graphs
- Separation Principle: Selection of optimal risky portfolio is purely technical, allocation between risk free vs risky assets depends on level of risk aversion
- Understand the basics of Markowitz Model for portfolio selection including the minimum-variance frontier, global minimum variance portfolio, and efficient frontier
- Understand the difference between risk pooling and risk sharing
BKM Ch 8:
- Know the equations for single-factor model and single-index model and the advantages/disadvantages of them over the Markowitz Model
- Understand the concept of a tracking portfolio and how to use one
- Know the process for calculating the weights of the optimal risky portfolio of the single index model
BKM Ch 9:
- Understand the idea behind CAPM - investors have identical inputs and information so their risky portfolios would be identical - this portfolio is the market portfolio
- Know the definition and formula for market price of risk
- Formula for beta for a stock
- Know the expected return of a security based on CAPM both in equilibrium and not in equilibrium
- Understand the security market line and its graph
- Know the basics of the extensions of CAPM: Zero Beta CAPM, CAPM w/ non-traded assets & labor income, multiperiod CAPM, consumption based CAPM, and CAPM with liquidity adjustments
BKM Ch 10:
- Know the equation for the return of the multifactor model
- Know the factors in the Fama French 3 factor model
- Understand the difference in risk return dominance vs arbitrage
- Be able to take advantage of an arbitrage opportunity and calculate the return
BKM Ch 11:
- Know the definitions of weak form, semi-strong form, and strong form EMH
- Definitions of technical analysis and fundamental analysis and which forms or EMH they’re useful for
- Issues with testing market efficiency: Magnitude issue, selection bias issue, lucky event issue.
- Market anomalies: Small firm in January effect, neglected firm effect, book-to-market ratio, post-earnings announcement price drift
- Anomalies could just be due to these things being proxies for more risk, which is why they have higher returns. Also data mining may lead to the anomalies.
- If markets are efficient why is portfolio management still useful? diversification, unique risk profile and tax considerations
BKM Ch 12:
- Information Processing Errors: Forecasting errors, overconfidence, conservatism, sample size neglect and representativeness
- Behavioral Biases: Framing, mental accounting, regret avoidance, affect, prospect theory
- Limits to Arbitrage: Fundamental risk, implementation costs, model risk
- There’s some info on technical analysis & behavioral finance but it hasn’t really been tested much historically so I’m just skipping it
BKM Ch 14:
- Know the basics of bonds including how to calculate the price based on the yield to maturity, coupon payments, and par value
- Know how to calculate nominal return, real return, current yield, yield to maturity
- Two types of risk for bonds are price risk and reinvestment risk
- Protective covenants: Sinking funds, subordination of further debt, dividend restrictions, collateral
- There’s a lot more detail in this chapter but it hasn’t really been tested so I’m not going to bother with it
BKM Ch 15:
- Spot rate vs short rate vs forward rate
- Know how to calculate interest based on different compound rates (annual, continuous, quaterly, etc)
- Know how to construct a synthetic loan from bonds and why they could be useful
- Expectations Hypothesis vs Liquidity Preference theory
BKM Ch 16:
- Formulas for Macaulay and Modified Duration
- Formula for percent change in price in terms of duration, yield rate change, and convexity
- Formula for convexity
- Conceptually understand why high convexity is good for the bondholder
- Know how the convexity for mortgage backed securities and callable bonds behaves
- Know how to calculate effective duration for a callable bond and duration of a perpetuity
- Passive strategies: indexing, immunization, cash flow matching. Know some advantages and disadvantages of each
- Bond swaps: Substitution swap, intermarket spread swap, rate anticipation swap, pure yield pickup swap
BKM Ch 23.3/23.4:
- Hedging interest rate risk: 4 steps for doing this.
- Know the basics of foreign exchange swaps and interest rate swaps
- There’s a bit of detail in this section but I’m just skipping over it and just understanding the basics since it hasn’t been tested in a long time.
Panning:
- Calculation of premium, current/franchise/total economic value
- Learn the calculation of duration of franchise value
- Know the advantages/disadvantages of different pricing strategies (fixed vs k = a + b*y)
Cummins CAT:
- Know the 5 risk linked securities and their advantages/disadvantages: CAT Bonds, Sidecars, Cat E-Puts, Cat risk swaps, Industry Loss Warranties
- Understand the trigger types, moral hazard risk, and basis risk
- There’s a section on factors impeding growth of the market but it hasn’t really been tested, so I’m not spending time there.
Cummins Capital:
- This paper has a lot of overlap with Goldfarb, so I’ll list most of the important topics there.
- Know the definition of RAROC and EVA
- Understand friction costs: agency & informational costs, double taxation, and regulations
- Calculation of Beta of equity in terms of beta of assets and liabilities for each line
- Calculation of the required rate of underwriting return in terms of beta for the line of business
- Know VaR and Insolvency Put Option/EPD, the benefits and drawbacks of each
- Merton-Perold method is just the incremental method from Goldfarb
- Myers-Read method is covered in Goldfarb as well as a marginal method, it allocates all of the capital unlike Merton-Perold
Butsic:
- Calculation of EPD for variable assets, variable liabilities, or both
- Calculation of EPD ratio
- Know the calculation of capital need for correlated risks and remember to multiply rho by -1 for items on opposite sides of the balance sheet
- There’s a bit more detail in this paper, but there are the only things that have been tested so far
Goldfarb:
- Learn the benefits/drawbacks of different capital amounts: Probability of Ruin, VaR, CTE (TVaR), EPD
- Learn the 4 different allocation methods: Proportional, Incremental, Marginal, Co-measures approach. Also learn their weaknesses and strengths
- Know how to calculate economic profit and RAROC, as well as multi-year target RAROC
- There’s some more information on risk sources but it hasn’t really been tested and if you’ve sat for 7 you should know it pretty well.
Coval, Jurek, & Stafford:
- Understand how asset backed securities work. CDOs vs CDO^2
- Know how to calculate probabilities of default and prices of junior/senior tranches for both CDOs and CDO^2s
- Know the sensitivites of junior/senior tranches of CDOs/CDO^2s to changes in default probabilities and correlations
- Learn the underlying causes of the financial crisis - why senior tranches of these CDO^2 had AAA ratings when they shouldn’t have and how the ratings compare to single firm ratings
Bodoff:
- How to allocate capital by percentile layer to specific loss events, then split that up into perils
- Both the horizontal procedure and vertical procedure should be known for both discrete and continuous cases
- Know the benefits of allocation by percentile layer over VaR, TVaR, etc
- Know how to calculate the premium net of expenses
McClenahan:
- Opportunity cost should be calculated using risk free rate since policyholders don’t take on any investment risk. Also investment gains on surplus shouldn’t be considered, only gains on policyholder supplied funds.
- Insurer should make more than opportunity cost since they earn more than risk free rate on investments
- ROE vs ROS: Problems with ROE: Return on Equity vs. Rate Equity, Surplus Allocation is artificial, Regulating ROE is often a complicated method of regulating ROS
- ROS is similar to markup in other industries and is preferable for regulation
- Indicators of insurers perceiving less opportunity for reasonable rate of return: increased size of residual market, reduced innovation, decreasing degree of product diversity
Feldblum:
- Know how to calculate IRR given different sets of assumptions with premium, expense, investment income, and loss payment patterns
- Problems with IRR: Multiple reversals of cash flows can create multiple solutions, assumes cashflows reinvested at IRR, if cost of capital > IRR > investment yield then regulators may think company is profitable when it really isn’t
- NPV is preferable to IRR due to these problems
Ferrari:
- Know the two forms of the formula for return on equity
- Know the definition of insurance leverage factor and the advantages/disadvantages of leverage
- Return on Equity, Assets, Sales are important for shareholders, society, and regulators/actuaries, respectively
- Understand how when U/R is negative it acts as the interest cost and if I/A exceeds U/R then the company should keep writing business
- The expected earnings stream and the discount rate are what affect the value of the firm
- Know the relationships between P/S, I/A, and U/P and be able to explain them
Robbin UW Profit Provision:
- Know how to do calculations for all 4 methods: CY Investment Income Offset, Present Value Offset, Present Value Cash Flow Return, and Risk-Adjusted Discounted Cash Flow
- CY Inv Inc Offset: Know how to calculate policyholder supplied funds. This method is easy to calculate since it’s based on CY financials, but isn’t grounded in modern financial theory and the initial profit provision is arbitrary
- PV Offset: Know the equation for premium as well as the present value factors of losses for the reference line and line you’re looking at. Not distorted by changing size of book and no need to select target return, still not grounded in modern financial theory
- PV Cash Flow Return: Discount cash flows at investment rate and changes in equity at target rate of return. Intuitive for how we think of UW profit, not clear what sort of profit is being measured, not same timing as GAAP.
- RA Discounted Cash Flow: Calculate CAPM return for discount rate of losses, discount everything else at risk-free rate. Discount everything to time 1. Grounded in modern financial theory and not necessary to determine a target rate of return, but hard to determine beta.
Robbin IRR, ROE, and PVI/PVE:
- PVI/PVE: Discount PVI to 1 and PVE to 0. Equity = Surplus + DAC when using GAAP equity. Calculate income based off standard UW income definition.
- I didn’t spend much time on IRR here at all since I felt like I already knew IRR from the Feldblum paper. I know the methodology is a bit different but I didn’t think it was worth putting much time into.
- Most of the stuff in the book of business growth model is kind of easy to work out if you make a table of what everything will be at at each end of year and beginning of year. I didn’t spend much time on memorizing things here.
- In equilibrium growth, the CY ROE = IRR if the book is growing at the IRR. PVI/PVE = IRR if the discount rate used is the IRR.
Kreps:
- Know the integral formula for risk load and what each term in the integrand represents
- Know the difference leverage models: Risk Neutral, Variance, TVaR, VaR, Semi-Variance, Mean Downside Deviation, and Proportional Excess
- Know management’s preferences for the riskiness leverage ratio
- Know regulators’ preferences for the riskiness leverage ratio
- Kreps defines Capital as mean loss + R
Mango:
- Be able to calculate expected loss, variance, covariance from the loss probability distribution
- Be able to calculate the risk load for the marginal surplus and marginal variance methods in the build-up scenario as well as the renewal scenario
- Be able to calculate the change in surplus need
- Know the definitions of sub-additive and super-additive
- Understand the concept of renewal additivity and that marginal surplus/variance methods aren’t renewal additive. Shapely value and Covariance share methods are though.
- Be able to calculate the risk loads using the Shapely Value and Covariance Share methods
- Understand the concepts from Game Theory: any individual will split from the group if it’s better for them. Any subgroup will split from the group if it’s better for them.
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Note that now I’ve sat for the exam I can say there were a couple questions I wasn’t super well prepared for so you shouldn’t use this list as an absolute of things you need to know, but I still think knowing all this was plenty for me to do well and pass, but I guess we’ll see in February.
I think you enjoy these exams too much
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Probably. It’s too bad I can’t do a new game+ and speed run them for a second time.
What…are you?