Question 4

Question4 (VaRZ): You are in charge of managing a portfolio for a Canadian Bank. The portfolio consists of three companies listed on TSX index: Stocks # of shares (Nllions) Price (Feb 1, 2021) Value Weight Bank of Montreal (BMO) 10 96.21 962.1 36.5% Sunom' (Su) 5 22.24 112.2 4.2% Shopify (Shop) 1 1562 1562 59.3% total value 100.00%. The bank wishes to introduce Value at Risk (VaR) as one of its risk management tools and has asked you to investigate this using your portfolio as a test case with a view to introducing it across all bank investments. You have decided to calculate the value at risk at a 99% condence level over a 10-day period using two different methods: 1. Historical simulation based on the data for the past two years. 2. Monte Carlo simulation for the portfolio as a whole. (You can use GEM-2 to simulate a Geometric Brownian Motion process) For the second method you know that you will need to calculate the volatility of the daily returns. You decided to use the volatilities 'om the actual data up to and including Feb 1 2021 for [calendar] periods of 1 quarter (= 3 months) and one year