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Homework answers / question archive / FIN5MRM MARKET RISK MANAGEMENT Individual Assignment Suppose that you own, at the end of 31st December 2020, a portfolio worth $20 million AUD consisting of investments in three stocks traded on the US markets

FIN5MRM MARKET RISK MANAGEMENT Individual Assignment Suppose that you own, at the end of 31st December 2020, a portfolio worth $20 million AUD consisting of investments in three stocks traded on the US markets

Finance

FIN5MRM MARKET RISK MANAGEMENT

Individual Assignment

Suppose that you own, at the end of 31st December 2020, a portfolio worth $20 million AUD consisting of investments in three stocks traded on the US markets. Appendix A provides the details of the portfolio allocation for each student, including stock tickers and the Australian dollar (AUD) value of each holding.

Daily closing prices of stocks can be downloaded from Yahoo Finance.1 Historical exchange rates can be obtained from: https://www.macrotrends.net/2551/australian-us- dollar-exchange-rate-historical-chart

Consider a historical sampling period of three years from 1st January 2018 through 31st December 2020. Each student needs to submit a written risk report for your portfolio and a supplementary Excel workbook through the submission link in Assessment Section on LMS2 by 24th May, which should include the following parts:

 

Part A1: Briefly describe the background for each firm in your portfolio.

[3 marks]

 

Part A2: First, calculate the 95% daily portfolio VaR using the basic methodology of the historical simulation approach.

[3 marks]

 

Part B1: Calculate the 95% daily VaR for the portfolio using the model-building approach. Generate a VaR report for the portfolio based on the model-building approach, which should contain the following elements:

  1. Undiversified VaR
  2. Diversified VaR
  3. Diversification benefit
  4. Marginal VaR
  5. Component VaR

[6 marks]

 

Part B2: Use your own words to explain what is the relationship between diversified VaR and undiversified VaR?

[2 marks]

 

Part B3: Use your own words to explain what is the relationship between marginal VaR and incremental VaR?

[2 marks]

 

 

 

 

 

 
 
 

 

1 http://au.finance.yahoo.com/

2 https://lms.latrobe.edu.au/mod/assign/view.php?id=5400355

 

 

Part B4: Marginal VaR in Part B1 is a useful tool for risk management. Discuss how to change a portfolio position to minimise the portfolio VaR while keeping the portfolio fully invested. Generate a new VaR report based on the risk-minimising positions.

[3 marks]

 

Part C1: Use the period 1st January 2021 to 31st December 2021 for VaR backtesting,3 and implement backtesting procedure to evaluate the portfolio VaR determined in Part A2 and Part B1, respectively, with unconditional coverage.

[3 marks]

 

Part C2: Use the period 1st January 2021 to 31st December 2021 for VaR backtesting, and implement backtesting procedure to evaluate the portfolio VaR determined in Part A2 and Part B1, respectively, with conditional coverage.

[3 marks]

 

Part C3: Backtesting is usually conducted on a short horizon, such as daily frequency. Use your own words to explain why.

[2 marks]

 

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 A2.

[3 marks]

 

 

Submission Instructions:

 

  1. The submission should include two files: a) your risk report in a Word document and

b) an Excel workbook. Please include all your Excel working in one single Excel file.

  1. The assignment is expected to be done in a professional manner, which means that grammar, spelling, and overall presentation will have an influence on the score.


Appendix A

Student ID

Portfolio Info

Stock 1

Stock 2

Stock 3

20421293

Stock Ticker

ETR

GM

CF

 

AUD millions

10

4

6

20420974

Stock Ticker

LNT

DRE

AIZ

 

AUD millions

4

4

12

20481728

Stock Ticker

AFL

HLT

CRM

 

AUD millions

10

8

2

20956686

Stock Ticker

LIN

SHW

KIM

 

AUD millions

5

7

8

19663080

Stock Ticker

PAYC

GRMN

PSA

 

AUD millions

5

5

10

18055119

Stock Ticker

NLOK

TTWO

BIO

 

AUD millions

14

4

2

20650177

Stock Ticker

TEL

FDX

ED

 

AUD millions

9

9

2

20342211

Stock Ticker

AVB

CL

CAH

 

AUD millions

7

3

10

20593054

Stock Ticker

VTR

HAL

TPR

 

AUD millions

8

8

4

This appendix contains portfolio allocation for each individual stock (the first column present students’ IDs), including stock tickers of the three stocks and their holdings in Australian dollar (AUD).

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