FIN5MRM - Market Risk Management - Daily Portfolio VaR - Risk Management Assignment Help

Assignment Task

Suppose that you own, at the end of 31st December 2019, a portfolio worth $25 million AUD consisting of investments in four stocks traded on the US markets. Appendix A provides the details of the portfolio allocation for each student, including stock tickers and the Australian dollar (AUD) value of each holding.

Part A1: Briefly describe the background for each firm in your portfolio.

Part A2: First, calculate the 95% daily portfolio VaR using the basic methodology of the historical simulation approach. Then, 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:
a. Undiversified VaR
b. Diversified VaR
c. Diversification benefit
d. Marginal VaR
e. Component VaR

Part B2: Use your own words to explain what is the relationship between diversified VaR and undiversified VaR?

Part B3: Use your own words to explain what is the relationship between marginal VaR and incremental VaR?

Part B4: Marginal VaR in Part B1 is a useful tool for risk management. Discuss how to change a portfolio position to minimise the portfolio VaR while keeping the portfolio fully invested. Generate a new VaR report based on the risk-minimising positions.

Part C1: Use the period 1st January 2020 to 31st March 2021 for VaR backtesting,3 and implement backtesting procedure to evaluate the portfolio VaR determined in Part A2 and Part B1, respectively, with unconditional coverage.

Part C2: Use the period 1st January 2020 to 31st March 2021 for VaR backtesting, and implement backtesting procedure to evaluate the portfolio VaR determined in Part A2 and Part B1, respectively, with conditional coverage.

Part C3: Backtesting is usually conducted on a short horizon, such as daily frequency. Use your own words to 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 A2.

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