Posted: May 22nd, 2015

Market Risk Management

FIN5MRM: Market Risk Management (2015, Semester One)
Group Assignment (Due date: 27 May, 2015) (Total: 20 marks)
Each group consists of one to three students.
To do: send the list of group members and their student IDs to the lecturer by email by 13 May, 2015. A group name will be assigned by the lecturer.
Suppose that you own, on 1 January, 2015, a portfolio worth $20 million AUD consisting of investments in five stocks 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 (http://au.finance.yahoo.com/). Consider a historical sampling period of three year (from 1st January 2012 through 31st December 2014). Each group needs to submit a written risk report for your portfolio and a supplementary Excel spreadsheet, which should include the following parts:
Part A1: Calculate the 95% daily portfolio VaR using the basic methodology of the historical simulation approach. (2 marks)
Part A2: Calculate the 95% daily portfolio VaR using the exponential weighting methodology of the historical simulation approach. (2 marks)
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: (3 marks)
(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? (1 mark)
Part B3: On average, what is the relationship between component VaR and individual VaR for a particular position? (1 mark)
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. (2 marks)
Part C1: Implement backtesting procedures to evaluate the portfolio VaR determined in Part A1, Part A2 and Part B1, respectively with unconditional coverage. (2 marks)
Part C2: Implement backtesting procedures to evaluate the portfolio VaR determined in Part A1, Part A2 and Part B1, respectively with conditional coverage. (2 marks)
Part C3: Backtesting is usually conducted on a short horizon, such as daily returns. Explain why. (1 mark)
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. (4 marks)
1 | P a g e
Appendix: Portfolio allocation for each group, including trading symbols of the five stocks and their holdings in Australian dollar (AUD)
Stock 1
Stock 2
Stock 3
Stock 4
Stock 5
Group 1
Stock Symbol
CBA.AX
PTM.AX
MMM
AAL.L
AC.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
4
5
3
1
7
Group 2
Stock Symbol
WBC.AX
FDC.AX
ABT
ABF.L
AI.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
3
5
2
6
4
Group 3
Stock Symbol
ANZ.AX
ANN.AX
ABBV
ADM.L
ALU.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
5
2
2
6
5
Group 4
Stock Symbol
BHP.AX
CGF.AX
ACN
AGK.L
AIR.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
6
3
2
5
4
Group 5
Stock Symbol
NAB.AX
HGG.AX
ACE
AMEC.L
ALO.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
4
3
5
5
3
Group 6
Stock Symbol
TLS.AX
TAH.AX
ACT
ANTO.L
MT.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
5
3
4
5
3
Group 7
Stock Symbol
WES.AX
FLT.AX
ADBE
ARM.L
CS.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
2
3
4
5
6
Group 8
Stock Symbol
CSL.AX
DUE.AX
ADT
AU.L
BNP.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
2
4
5
5
4
Group 9
Stock Symbol
WOW.AX
EGP.AX
AES
AV.L
EN.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
3
4
6
5
2
Group 10
Stock Symbol
WPL.AX
ILU.AX
AET
AZN.L
CAP.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
4
4
5
5
2
Group 11
Stock Symbol
MQG.AX
TWE.AX
AMG
BA.L
CA.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
4
4
5
5
2 2 | P a g e
Group 12
Stock Symbol
RIO.AX
MFG.AX
AFL
BARC.L
ACA.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
4
3
3
6
4
Group 13
Stock Symbol
SCG.AX
QUB.AX
A
BATS.L
EDF.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
5
2
5
6
2
Group 14
Stock Symbol
WFD.AX
DMP.AX
GAS
BG.L
EI.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
3
7
5
3
2
Group 15
Stock Symbol
AMP.AX
IFL.AX
APD
BLND.L
GTO.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
3
7
5
2
3
Group 16
Stock Symbol
TCL.AX
ABC.AX
ARG
BLT.L
GSZ.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
5
4
5
5
1
Group 17
Stock Symbol
BXB.AX
SKI.AX
AKAM
BP.L
BN.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
4
4
6
4
2
Group 18
Stock Symbol
QBE.AX
ORA.AX
AA
BRBY.L
KER.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
3
3
4
4
6
Group 19
Stock Symbol
SUN.AX
PRY.AX
ALXN
BSY.L
OR.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
6
3
4
4
3
Group 20
Stock Symbol
AMC.AX
SGM.AX
ALLE
WEIR.L
LG.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
4
4
4
4
4
Group 21
Stock Symbol
IAG.AX
BSL.AX
AGN
CCL.L
LR.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
5
4
5
4
2
Group 22
Stock Symbol
RHC.AX
SPO.AX
ADS
CNA.L
MC.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
2
3
5
5
5
Group 23
Stock Symbol
ORG.AX
PPT.AX
ALL
CNE.L
ML.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
2
3
6
5
4
3 | P a g e
Group 24
Stock Symbol
RMD.AX
IOF.AX
ALTR
CPG.L
ORA.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
2
3
7
5
3
Group 25
Stock Symbol
OSH.AX
WOR.AX
MO
CPI.L
RI.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
3
2
6
5
4
Group 26
Stock Symbol
SYD.AX
CAR.AX
AMZN
CSCG.L
PUB.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
4
2
5
5
4
Group 27
Stock Symbol
GMG.AX
REC.AX
AEE
DGE.L
RNO.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
5
2
4
5
4
Group 28
Stock Symbol
SGP.AX
DLX.AX
AEP
EMG.L
SAF.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
6
3
4
5
2
Group 29
Stock Symbol
NCM.AX
SKC.AX
AXP
ENRC.L
SGO.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
3
2
3
5
7
Group 30
Stock Symbol
AZJ.AX
FXJ.AX
AIG
ESSR.L
SAN.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
5
2
5
5
3
Group 31
Stock Symbol
CTX.AX
SKT.AX
AMT
EXPN.L
SU.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
6
3
5
3
3
Group 32
Stock Symbol
AGL.AX
GNC.AX
AMP
FRES.L
GLE.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
6
4
5
4
1
Group 33
Stock Symbol
AZJ.AX
FXJ.AX
AIG
EMG.L
SAF.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
6
4
5
3
2
Group 34
Stock Symbol
NCM.AX
SKC.AX
AIG
ESSR.L
SAN.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
4
2
5
3
6
Group 35
Stock Symbol
AZJ.AX
FXJ.AX
AIG
EMG.L
SAF.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
2
3
5
5
5
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Group 36
Stock Symbol
AZJ.AX
FXJ.AX
AIG
ESSR.L
SAN.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
3
2
8
5
2
Group 37
Stock Symbol
OSH.AX
WOR.AX
AMT
EXPN.L
SU.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
4
2
5
5
4
Group 38
Stock Symbol
OSH.AX
WOR.AX
AIG
EMG.L
SAF.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
3
2
3
6
6
Group 39
Stock Symbol
GMG.AX
REC.AX
AEE
DGE.L
GLE.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
7
2
4
4
3
Group 40
Stock Symbol
AGL.AX
GNC.AX
AMP
FRES.L
SAN.PA
[Market]
[Australia]
[Australia]
[US]
[UK]
[France]
(AUD millions)
4
2
4
5
5
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