Market Risk Management Group Assignment-
Suppose that you own, on 1 January 2016, a portfolio worth $10 million AUD consisting of investments in four stocks traded on domestic and international markets. Appendix provides the details of the portfolio allocation for each group, including the trading symbol and the trading market of each stock and the Australian dollar (AUD) value of each holding.
Daily closing prices of stocks can be downloaded from yahoo finance (https://au.finance.yahoo.com/). Consider a historical sampling period of three year (from 1st January 2013 through 31st December 2015). Each group needs to submit a written risk report for your portfolio which should include the following parts:
Part A1: Calculate the 95% daily portfolio VaR using the basic methodology of the historical simulation approach.
Part A2: Calculate the 95% daily portfolio VaR using the exponential weighting methodology of the historical simulation approach.
Part B1: Calculate the 95% daily VaR for the portfolio using the model-building approach. Generate a VaR report for the portfolio based on the model-building approach, which should contain the following elements:
(i). An analysis of the diversification effect (undiversified VaR and diversified VaR)
(ii). Marginal VaR
(iii). Component VaR
Part B2: What is relationship between marginal VaR and incremental VaR?
Part B3: On average, what is the relationship between component VaR and individual VaR for a particular position?
Part B4: Marginal VaR in Part B1 are useful tools for risk management. Discuss how to change the portfolio positions to minimizing the portfolio VaR while keeping the portfolio fully invested. Generate a new VaR report based on the risk-minimizing positions.
Part C1: Implement backtesting procedures to evaluate the portfolio VaR determined in Part A1, Part A2 and Part B1, respectively, with unconditional coverage.
Part C2: Implement backtesting procedures to evaluate the portfolio VaR determined in Part A1, Part A2 and Part B1, respectively with conditional coverage.
Part C3: Backtesting is usually conducted on a short horizon, such as daily returns. Explain why.
Part D: Contrast and compare your findings in Part C1 and Part C2 and further comment on the performance of the market risk measurement approaches used in Part A1, Part A2 and Part B1.