Value at Risk

This is a Bloomberg-based exercise.

Student number is 5182018

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/).

Rules for the choice of companies A and B. Company A is ranked as the sum of all the digits in your student number, and company B is ranked as the sum of the last two digits of your student number. The ranking is based on market cap, with 1 indicating the largest company at the ASX and 50 the fiftieth largest company. If the sum of all the digits, in case of A, is more than 50, you will choose the company with the rank of (the sum - 50). In case of B, if the sum is 0, you then choose the rank of 1. For example, if your student number is s9999888, company A should be ranked as (9+9+9+9+8+8+8)=60-50=10; company B should be ranked as 8+8=16. If your student number is s1234500, you should choose company A with the rank of (1+2+3+4+5+0+0)=15, and company B with the rank of (0+0)=0+1=1. Please provide a screenshot of the ranking list.

Once you identify the two companies, you can retrieve relevant data from Bloomberg. Please use the instructions available under L@G/Course contents/Bloomberg remote access and timetable. In your course site, there is a section called "Bloomberg Recordings", where you can find some instruction videos which may be helpful to you in navigating the Bloomberg system. 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.