TAILIEUCHUNG - Lecture Financial risks management - Topic 2: Measuring portfolio risk and return
Lecture Financial risks management - Topic 2: Measuring portfolio risk and return. In this chapter, students will be able to understand measure the risks of a stock investment; measure the risks of a portfolio of stocks, bills, and bonds. | 1 A Course in Risk Management Instructor: Lou Gattis Topic #2: Measuring Portfolio Risk and Return 1 Tent Cards/Seinfeld/Syllabus/Lecture/Enron/Lecture Learning Objectives Measure the risks of a stock investment Measure the risks of a portfolio of stocks, bills, and bonds 2 Risk Measurement - Measures What is the risk of a $100,000 investment in domestic stocks? Stress Tests Hypothetical Stress Test . +/- 10%, . Market Crash: -30% Historical Stress Test . Great Depression, Housing Crash, Black Monday (10/19/87) Value-at-Risk (VaR) Historical Simulated VaR . 1-year, 90%, 95%, 99%, Variance-Covariance VaR (Assumes Normal Distribution) . 1-year Horizon, 90% Confidence Interval . 1-day Horizon, 95% Confidence Interval . 5-day Horizon, 95% Confidence Interval 3 Hypothetical Stress Tests $100,000 investment in domestic stocks A hypothetical stress test specifies a specific loss and/or market environment +/- 10%: $10,000 30% Market Crash: $30,000 Pros Transparent, Simple Cons No horizon specified Do not know likelihood of loss Does not use historical record 4 Historical Stock Returns 5 Historical Stress Tests A historical stress test computes the loss from a historical time period and/or event Examples for $100,000 stock investment Great Depression 1929-1931: $61,582 Housing Crash 2008: $36,550 Black Monday (October 19, 1987): $22,680 Pros Transparent, Simple Uses the historical record Horizon specified Cons Do not know likelihood of future loss Cannot specify horizon Historical sample is limited 6 1928-2011 Historical Simulated VaR VaR is the maximum loss not exceeded with given a horizon and confidence level Example: What is the maximum loss over 1-year with a 90% confidence level. Historical Simulated VaR: Simulates portfolio losses using historical asset returns. VaR(1-Year, 90%) = 10th percentile largest loss Using the 84 years supplied, record the 8th (.1*84) largest loss 7 Returns Sorted Low to High Percent = # / 84 obs Variance-Covariance VaR
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