The Role of VaR in Enterprise Risk Management

The role of VaR in Enterprise Risk Management: (Note: There is an Excel template that should be used for this case study in questions 2-3, and please use MS Word for the answer to question #4.)

Mr. Young is the CFO of a $49 million revenue logistics company and has excess cash funds to invest in a specific stock. His research shows that Tesla may be an opportunity to invest extra cash built up over the past year from record profits. Tesla, as Mr. Young feels, is on the cutting edge of electric automobiles to the masses and has a current stock beta of .97. However, he wishes to use the VaR calculation to quantify the upside and downside risk to the company to help him recognize if Tesla stock is a good choice. Please see below for the assignment parameters.

1. Please visit the link below to gain a greater grasp of VaR and its application to risk. http://www.investopedia.com/articles/04/092904.asp?lgl=rira-baseline-vertical
   1. Also, see: http://investexcel.net/value-at-risk-methods-spreadsheets/
2. Next, use Yahoo Finance to gain Tesla's (TSLA ticker symbol) monthly closing stock price from the last 5yrs/60 Mo.. Download the information into Excel. (There should be 60 data rows) Then cut and paste the date and stock close columns of data into the attached Excel template. Once completed, the template will automatically calculate the dollar and percentage changes in monthly stock prices and graph the data accordingly.
4. Using a VaR variance/covariance method tab in the Excel template worksheet, calculate the value at risk with the following parameters for Mr. White inclusive of the following assumptions:
   1. Portfolio Value: $143,500
   2. Average return: 8.5%
   3. Standard deviation: 10%
   4. Confidence level: 95%
5. Based upon the findings of #2 and #3, please use Word to answer your results of Tesla VaR benchmarks and what do they mean. Copy graphs and VaR Calculation into the Word document.
   1. What are the advantages and disadvantages of using VaR?
   2. Please explain what you would advise Mr. Young to do regarding his choice of Tesla's investment for the company.
   3. He should explain to the CEO the possible risk impact on the company.
   4. What information did you find in this data and your research to support your recommendation?

Answer rating: 100% (QA)

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