This is a Bloomberg-based exercise.

Suppose you hold a portfolio consisting of a $350,000 investment in company A stock and a $650,000 investment in company B stock. Companies A and B are ASX50 constituent companies (see https://www.asx50list.com/). The rank of A is 30, The rank of B is 15. Please provide a screenshot of the ranking list.If you cannot access Bloomberg terminal, alternatively you can go to Yahoo! Finance to retrieve the relevant data.

You can now start performing the following tasks:

a.Search for the stocks of these two companies. Download historical daily price data over the last 501 trading days (approx. 2 years).

b.Calculate with Excel the daily returns of the stocks of companies A and B.

Now you need to estimate VaR with the two approaches you learned in class.

Historical simulation:

c.Based on the 500 returns for each stock calculated in b., calculate 500 alternative scenarios for the $ value of the $350,000 investment in company A stock and the $650,000 investment in company B stock, respectively. Sum these two for each scenario to obtain 500 simulations for the $ value of your portfolio consisting of stock A and stock B.

d.Based on the 500 scenarios for the $ value of your portfolio consisting of stock A and stock B, calculate the 500 alternative gains/losses for your portfolio.

e.Calculate the 5-day 99% VaR for this portfolio. What does it mean?

f.Briefly discuss the advantages/disadvantages of this approach.

Model-building approach:

g.Calculate the standard deviations of the stocks' returns over the last two years.

h.Calculate the coefficient of correlation between the stocks' returns.

i.Compute the 5-day 99% VaR for this portfolio. What does it mean?

j.By how much does diversification reduce the VaR? Also provide a brief comment on the reduction.

k.Briefly discuss the advantages/disadvantages of this approach.

Finally,

l.Compare the results of both approaches. Provide possible explanations for the differences.

m.Briefly discuss the usefulness of VaR.

Additional submission requirements for problem 4:

Additionally to your calculations, please insert in the Word file that you will submit the screenshots you have made showing companies which you have used.

Upload the Excel file showing your data and calculations.