Value At Risk Of A Portfolio Case Study

685 Words2 Pages
bulb-icon

Recommended: Discussion of portfolio theory

Part B2: Discuss how to change the portfolio positions to minimizing the portfolio
VAR while keeping the portfolio fully invested.

The first tool for risk management is the marginal VAR which used to measure the effect of changing positions on portfolio risk. It measure the marginal contribution to risk by increasing w by a small amount. Therefore, Marginal VAR (value at risk) allows risk managers to study the effects of adding or subtracting positions from an investment portfolio. Since value at risk is affected by the correlation of investment positions, it is not enough to consider an individual investment's VAR level in isolation. Rather, it must be compared with the total portfolio to determine what contribution is makes to the portfolio's VAR amount.

An investment may have a high VAR individually, but if it is negatively correlated to the portfolio, it may contribute a much lower amount of VAR to the portfolio than its individual VAR.

Part D: Contrast and compare your findings in Part C1 and Part C2 and further comment on the performance of the market risk measurement approaches used in Part A1, Part A2 and Part B1.

Analysis of Value at Risk of a portfolio
The key purpose for managing risk is to evaluate the risk and improve the performances of consolidated value of a firm to achieve profitability. Currently the benchmark tool for measuring the risk is VAR (Value at Risk). VAR evaluate the maximum loss a value of a portfolio has for a given interval on a pre-determined period of time. It is commonly used in brokerage houses, investment banks and institutions to measure a risk on their portfolios.
In this study the value at risk is determined under the following approaches:
• Historical Simulati...

... middle of paper ...

...l level then the under estimation of the risk for a particular portfolio’s VAR. The exceptions must truly be showing the exact result as the interval level. If this possibility is matched then it shows that the portfolio’s VAR in reality is the actual figure.

Conditional Coverage:
Conditional coverage of backtesting techniques determined the occurrence of losses on frequency basis. It works on the same basics used in the POF and the only difference in this method is the independence of the exceptions. In this if VAR is exceeded from the interval level then the result will show the value as 1 and if the interval level stays lower than the interval level then it shows the value as 0.
If 1 value shows than it means that the violation occurs and if 0 values shown in the test than it mean that no violation occurred mean no losses occurred during this period of time.

Show More
Related

  • Risks Facing Investors in the Article, Can We Keep Our Promises?” by Robert D. Arnott

    1677 Words  | 4 Pages

    He defines each of these risks, as well as gives a few examples of each one. He quickly jumps into how many tend to focus on standard deviation as the only single metric calculation, rather than recognizing there are other ways to do so. The author discourages the focus on just one risk, because all are intertwined together and rely on one another. By focusing on only one risk, for example peer risk, it leaves the company up for even more risk in its assets and pension obligations. Figure 1 illustrates that these risks do indeed rely on one another.

    Read More

  • Nt1210 Chapter 8

    1132 Words  | 3 Pages

    8.1.2 Statement of scope The software testing is to be done for all components in every module of software. The input and output of each module will be tested to be accurate and valid for given input. The results of the modules must be compared with actual known values to test the

    Read More

  • Proindex Fund Case Study

    2343 Words  | 5 Pages

    Over the previous five years, the return of the ProIndex fund have outperformed the S&P 500 index, as the 5-year-return is nearly 3 times than the benchmark and the annualised return is nearly 2 times than the benchmark. It means ProIndex fund has a significant increase in value within that period. However, the ProIndex Fund has a higher standard deviation which means it is more risk than the S&P 500 index. Especially for the annualised standard deviation, it is approximately 10% higher than the benchmark. The correlation coefficient between the ProIndex and benchmark is about 0.65 which means both two variables are positive changing consistently, but there are still some other factors which have impacts on the relationship between two variables as the correlation is less than 1. Furthermore, the higher beta, 1.0132, which is more than 1 and it may be one of the reasons for high risk as well since it is more sensitive to the market change. It means that the ProIndex fund would increase by 1.0132% if the market increased by 1%.

    Read More

  • Designing a Random Number Generator

    2071 Words  | 5 Pages

    Single level test- It’s a 1st level test observes the p-value, where p is a measure of uniformity. If p-value is extremely close to 0 to 1 then the generator fails since it produced value with very high uniformity (close to 1) or it is not uniform at all.

    Read More

  • Portfolio Analysis and Investment

    987 Words  | 2 Pages

    ...n efficient set that is on a straight line connecting the risk free rate to the most northwest point that we had identified previously. Now the risk averse investor has a lower risk for the same amount of return compared to the portfolios that did not include risk free lending. The combination is better because the points on the straight line are further northwest than the portfolios from the previous paragraph. Of course the lower the level of risk aversion the further toward the tangent the investor?s optimal portfolio moves.

    Read More

  • Questions and Answers: Loss Prevention and Loss Reduction

    810 Words  | 2 Pages

    Insurance use as a loss-financial technique provide financial advantage. Business write the insurance premiums cost as a tax deduction expense. As long as the premiums are fix for the duration of the policy the budget is not. In addition, when the organization loss frequency is low and severity probability is high, insurance provide the require funds in case if loss. Which, will be impossible for some individuals and organization to provide on their own.

    Read More

  • Film Developing

    1904 Words  | 4 Pages

    Should such a test reveal a thin negative, some compensation can be made when developing the remainder of the roll. (Horrell 19)

    Read More

  • Quantitative Assessment Essay

    710 Words  | 2 Pages

    Once risk likelihood and consequence have been estimated, the risk can be plotted on a risk reporting matrix (see Figure 15.3.6). Multiplying likelihood by consequence yields the risk level. For qualitative assessments, this will yield a rating such as HL; while quantitative estimates will yield a numerical output. Risk analysis concludes with prioritization of the risks on the register; from highest to lowest risk level.

    Read More

  • Risk Management: COSO and SHAMPU frameworks

    2000 Words  | 4 Pages

    Over the past decade, risk and uncertainty have increasingly become major issues which impact business activities. Many organizations are raising awareness to minimize the adverse consequences by implementing the process of Risk Management Framework which plays a significant role in mitigating almost all categories of risks. According to Ward (2005), the objective of risk management is to enhance a company’s performance. In particular, the importance of the framework is to assist top management in developing a sensible risk management strategy and program.

    Read More

  • The Five Steps Of Risk Management In Coca-Cola

    965 Words  | 2 Pages

    As has been discussed before, risk identification plays an important part in the risk such as unique, subjective, complex and uncertainly. There are no two identical leaves in the world; similar, there are no two exactly the same risk either. Hence the best risk manger could not identify risk completely. Besides, risk identification assessment is done by risk analysts. As the different level of risk management knowledge, practical experience and other aspects between individuals, the result of risk identification may be difference. Furthermore, the process of identifying risk is still risky. Once risks have been identified, corporations have to take actions on limiting risky actions to reduce the frequency and severity of risky. They have to think about any lost profit from limiting distribution of risky action. So reducing risk identification risk is one of assessments in the risk

    Read More

  • Principles Of Testing And Quality Assurance In ICT

    1792 Words  | 4 Pages

    Test cases must have two components, a. A description of the input data to the program, and b. A precise description of the correct output of the program for that set of data. If the result of outputs have not been predefined results can be misinterpreted as correct and be therefore erroneous. Outputs should be precisely defined in advance so the results can be examined to see if the test case meets the defined expectations or not.

    Read More

  • Risk Management Strategies

    1713 Words  | 4 Pages

    Risk is the potential loss resulting from the balance of threat, vulnerabilities, countermeasures, and value. ...

    Read More

  • Financial Theories And Strategies

    1533 Words  | 4 Pages

    The Modern portfolio theory {MPT}, "proposes how rational investors will use diversification to optimize their portfolios, and how an asset should be priced given its risk relative to the market as a whole. The basic concepts of the theory are the efficient frontier, Capital Asset Pricing Model and beta coefficient, the Capital Market Line and the Securities Market Line. MPT models the return of an asset as a random variable and a portfolio as a weighted combination of assets; the return of a portfolio is thus also a random variable and consequently has an expected value and a variance.

    Read More

  • Importance Of Risk Identification

    987 Words  | 2 Pages

    Risk identification has three main objectives, firstly is to monitor existing risk. Monitoring the existing risk is

    Read More

  • Portfolio Management: An Introduction To Portfolio Management

    3780 Words  | 8 Pages

    The risks and rewards are in essence interrelated to each other where tolerance of the risks tends to influence or even dictate the rewards. An investor whose goal is to maintain his/her current assets instead of growing them, he/she will keep only safe and secure investments in the portfolio.

    Read More

More about Value At Risk Of A Portfolio Case Study

Open Document