Value At Risk Of A Portfolio Case Study

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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.

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