IPS/VAR

It is your first day as a financial advisor in the far off lands of Westeros. You meet

Daenerys Targaryen, 26, and her husband, Jon, 25, who are considering what to do

with a recent windfall they received after the untimely death of Daenerys's father,

the mad king. The windfall is estimated to be 4,250,000 gold coins (after taxes).

Daenerys is currently the self-declared queen of the free men but only commands a

salary of 75,000 gold coins annually (armies are expensive to feed). Jon is, and

always has been, a non profit warrior, drawing a minimal salary of 40,000 gold

coins per year. The Targaryens do not have any children...yet, but suspect that

they might have a bundle of join coming in the next nine months. By design, the

Targaryens owe no debt and pay their expenses on a monthly basis. Family

expenses last year amounted to approximately 80,000 gold coins and expected to

grow the next year thereafter at the rate of inflation given the pending surprise.

In addition to the inheritance they will receive, the Targaryens have an additional

2,630,000 gold coins in savings. Daenerys and Jon have approached you, for

assistance in managing their portfolio. The Targaryens made the following

statements at a recent client discovery meeting:

?

"One of our goals at this stage in our lives is to pay for the college education

of our child. We would like him to go to Jon's alma mater, which is a

prestigious Northern University."

?

"We expect our annual expenses to increase at the general rate of inflation

of 2.71%."

?

"We abdicate the throne to our child at the ages of 65 and 66 and to be able

to live comfortably, but not extravagantly."

?

"We are taxed at 18% on both income and capital gains."

?

"We believe our portfolio should never suffer an annual loss of more than

5%. In addition, we do not want to invest in any individual investment or

security that is too risky."

?

"We do not foresee any unusual expenses over the short term. As always,

we would like to have enough cash on hand for emergencies."

i)

Determine the Targaryen's willingness and ability to tolerate risk, their

overall risk tolerance. (5 pts)

FIN 443 | Fall 2017 | Homework 1

ii)

Now let's calculate the required return (from the portfolio) for the next year

assuming now that everything else being the same, living expenses were

275,000 coins (hint, this will actually be a number and you need to take into

account income taxes and inflation into the returns). These numbers are

only relevant for this question. (5 pts)

iii)

Determine the Targaryen's time horizon, liquidity needs (hint, part of this is

a number related to expenses), and legal, regulatory and tax considerations.

(5 pts)

2) Institutional IPS

The Cassidy Endowment Fund is a nonprofit organization to aid the homeless. The

fund has assets totaling $5 million, and directors of the endowment anticipate a

spending rate of 6%. Inflation is expected to be 3% annually.

Formulate and justify investment policy objectives for the Cassidy Endowment

Fund in the following three areas:

i.

Return objective

ii.

Risk Tolerance

iii.

Time horizon

FIN 443 | Fall 2017 | Homework 1

i)

Return objective

ii)

Risk tolerance

iii)

Time horizon

3) VaR

Similar to what we did in class, you will calculate the VaR for the Hang Seng Index

(HSI). You will be required to do the following in Excel:

?

Download all the relevant Hang Seng Index from December 30, 1986 to

September 26, 2017 (inclusive)

o

You may have to eliminate any data that is considered noise

?

Calculate the daily VaR at the 95% and 99% confidence interval

?

Calculate the Annual VaR at the 95% and 99% confidence interval

?

Calculate the $ VaR based on a $25,000,000 portfolio at the 95% and 99%

confidence interval

What you will need to provide is a snapshot summary of the requested results

above as well as a short paragraph interpreting those results. Please also include

your working excel sheet (formulas and all) when submitting. I have posted an

example online of what we already did for the S&P500. (20 pts)

i)

Before you even start, what is the keyboard shortcut that will make sorting

through the data and eliminating useless data? (1 pt)

ii)

What do you need to do with the price data in order to actually calculate the

standard deviation? (1 pt)

iii)

What do you use for this calculation, close or adjusted close and why? (1 pt)

iv)

What is the data table? (12 pts)

v)

Include the excel table (5 pts)

FIN 443 | Fall 2017 | Homework 1 IPS/VAR It is your first day as a financial advisor in the far off lands of Westeros. You meet Daenerys Targaryen, 26, and her husband, Jon, 25, who are considering what to do with a recent windfall they received after the untimely death of Daenerys's father, the mad king. The windfall is estimated to be 4,250,000 gold coins (after taxes). Daenerys is currently the self-declared queen of the free men but only commands a salary of 75,000 gold coins annually (armies are expensive to feed). Jon is, and always has been, a non profit warrior, drawing a minimal salary of 40,000 gold coins per year. The Targaryens do not have any children...yet, but suspect that they might have a bundle of join coming in the next nine months. By design, the Targaryens owe no debt and pay their expenses on a monthly basis. Family expenses last year amounted to approximately 80,000 gold coins and expected to grow the next year thereafter at the rate of inflation given the pending surprise. In addition to the inheritance they will receive, the Targaryens have an additional 2,630,000 gold coins in savings. Daenerys and Jon have approached you, for assistance in managing their portfolio. The Targaryens made the following statements at a recent client discovery meeting: i) \"One of our goals at this stage in our lives is to pay for the college education of our child. We would like him to go to Jon's alma mater, which is a prestigious Northern University.\" \"We expect our annual expenses to increase at the general rate of inflation of 2.71%.\" \"We abdicate the throne to our child at the ages of 65 and 66 and to be able to live comfortably, but not extravagantly.\" \"We are taxed at 18% on both income and capital gains.\" \"We believe our portfolio should never suffer an annual loss of more than 5%. In addition, we do not want to invest in any individual investment or security that is too risky.\" \"We do not foresee any unusual expenses over the short term. As always, we would like to have enough cash on hand for emergencies.\" Determine the Targaryen's willingness and ability to tolerate risk, their overall risk tolerance. (5 pts) FIN 443 | Fall 2017 | Homework 1 ii) Now let's calculate the required return (from the portfolio) for the next year assuming now that everything else being the same, living expenses were 275,000 coins (hint, this will actually be a number and you need to take into account income taxes and inflation into the returns). These numbers are only relevant for this question. (5 pts) iii) Determine the Targaryen's time horizon, liquidity needs (hint, part of this is a number related to expenses), and legal, regulatory and tax considerations. (5 pts) 2) Institutional IPS The Cassidy Endowment Fund is a nonprofit organization to aid the homeless. The fund has assets totaling $5 million, and directors of the endowment anticipate a spending rate of 6%. Inflation is expected to be 3% annually. Formulate and justify investment policy objectives for the Cassidy Endowment Fund in the following three areas: i. ii. iii. Return objective Risk Tolerance Time horizon i) Return objective ii) Risk tolerance FIN 443 | Fall 2017 | Homework 1 iii) Time horizon 3) VaR Similar to what we did in class, you will calculate the VaR for the Hang Seng Index (HSI). You will be required to do the following in Excel: Download all the relevant Hang Seng Index from December 30, 1986 to September 26, 2017 (inclusive) o You may have to eliminate any data that is considered noise Calculate the daily VaR at the 95% and 99% confidence interval Calculate the Annual VaR at the 95% and 99% confidence interval Calculate the $ VaR based on a $25,000,000 portfolio at the 95% and 99% confidence interval What you will need to provide is a snapshot summary of the requested results above as well as a short paragraph interpreting those results. Please also include your working excel sheet (formulas and all) when submitting. I have posted an example online of what we already did for the S&P500. (20 pts) i) Before you even start, what is the keyboard shortcut that will make sorting through the data and eliminating useless data? (1 pt) ii) What do you need to do with the price data in order to actually calculate the standard deviation? (1 pt) iii) What do you use for this calculation, close or adjusted close and why? (1 pt) iv) What is the data table? (12 pts) v) Include the excel table (5 pts) FIN 443 | Fall 2017 | Homework 1