Port-polio Management Risk Value

Port-polio Management Risk Value

Value At Risk:

In class we demonstrated a form of risk calculation known as Value at Risk (VAR).  Using provided data, you will calculate the VaR for the IBOVESPA Index (Brazil’s main index).  You will be required to do the following in Excel (IBOV Data):

  • Data is already provided (be mindful of which price to use and also the time interval)
  • Calculate the daily VaR at the 95% and 99% confidence interval
  • Calculate the Annual VaR at the 95% and 99% confidence interval
  • Calculate the $ VaR based on a $50,000,000 portfolio at the 95% and 99% confidence interval

What you will need to provide is a snapshot summary of the requested results above as well as a short paragraph interpreting those results.  Please also include your working excel sheet (formulas and all) when submitting.  I have posted an example online of what we already did for the S&P500.  (20 pts)

  1. In order to calculate volatility, or standard deviation, what must you do to raw price data? (1 pt)
  2. What is a major deficiency of VaR? (4 pts)

Please provide a data table summarizing the results of your VaR analysis for a $500,000,000 portfolio for the 95% and 99% confidence intervals. This table should include (12 pts):

  • Daily standard deviation
  • Daily VaR
  • The annualized VaR
  • The $ annualized Va

Your excel demonstrating your work (3 pts)

  • Individual IPS (15 pts)

Johnny Lawrence (55 yrs old) has decided to make a dramatic shift in his life and quit his job to open his own gym.  He had previously earned a steady living which just covered his basic expenses which in the past year amounted to approximately $49,800.  These expenses along with his previous wages grew together at the rate of inflation.  Unfortunately, this left him with no additional savings except for around $4500 in the bank.

In order to start his business, Mr. Lawrence takes out a $10,000 loan to get the business started.  Due to current stimulus measures, the rate on this loan is effectively 0% (think hard about this 0%).

Fast forward to one year later, his gym business has been more successful than he imagined.  His bottom line from the business has netted him $205,000 for the business.  He reaches out to you to give him some advice on what to do with his excess savings.

As an advisor, you have been engaged Mr. Lawrence to evaluate his financial situation.  You believe it is prudent to conduct an interview to better understand his goals as well as his risk/return profile.   The following are excerpts from that interview:

  • “I have always been of the mind, strike hard, strike first. I don’t have time to wait and see how things play out.”
  • “I just found out about the internet and love all these tech stocks! All these new names are going to fly!”
  • “I have an estranged son whose mom has taken care of all his needs. But if something happens to me, I would like to pass anything left over to him.”
  • “I believe I can operate this business until the day I die without any complications or the business failing.”
  • “According to my last tax returns, my current income tax rate is 22.5% while capital gains is at 35%”
  • “I see the business net income growing at 15% for the next year.”

Determine Mr. Lawrence’s willingness and ability to tolerate risk, their overall risk tolerance. (5 pts)

Assuming that inflation has and will continue to be 2%, calculate the following (5 pts):

  • What is the size of Mr. Lawrence’s portfolio if there is one this year? (1.5 pts)
  • What is his net income (personally) for the next year? (1.5 pts)
  • Assume now that Mr. Lawrence suffers an injury that sets him back with reoccurring medical expenses. This increases his expenses next year by $170k.  Assuming that his business grew as expected, what is the required return on his portfolio (2 pts)?
  1. Assuming that the situation in (iii) did not happen, determine Mr. Lawrence’s time horizon, liquidity needs for the next year, and legal, regulatory and tax considerations. Assume the details still hold from part (i) and living expenses have not increased as they did in part (ii)(5 pts)
  2. Institutional IPS

Evil Corp is a large international multi-conglomerate, headed out by CEO Tyrell Wellick.  The company was faulted with a leak in their nuclear plant 5 years ago and was obligated to pay for the ongoing expenses of 35% of their workforce to supplement earnings and medical care.  In order to pay for these ongoing expenses, the company formed a fund.

After using Capital Group as the manager of the fund since inception, Mr. Wellick has chosen you to take over the fund’s management.  In doing so he provides you some background on Evil Corp.  The following is some highlights of that information:

  • Evil Corp has annual sales of $4.5 bn
  • Our current payroll has been at $325 mm and has grown with inflation
  • Net Income is at $2.1 bn with a 15% 5 yr CAGR
  • The average age of the people affected by the leak are 65
  • The average age of our remaining workforce is 32
  • The liabilities for the accident have a present value of $150 mm while we have allocated $225 mm
  • We applied a 7.6% discount rate to the liabilities
  • In the past five years, Capital group has generated a return of 7.9% for us

Wellick specifies that for the next year they need to generate $15 mm to meet expected expenses.  However in the allocation process they would like to maintain 10% for cash and alternatives.

Formulate and justify investment policy objectives for Evil Corp in the following three areas (15 pts total):

  • Return objective
  • Risk tolerance
  • Time horizon

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