Risk Management 1 MIDTERM EXAMINATION coursework Risk Management (FINA304/BUSN306) Date: 12 December 2020 Deadline 9 January 2021, at 17.00 hours Instructions to the students: 1. Your coursework must...

pls see pdf


Risk Management 1 MIDTERM EXAMINATION coursework Risk Management (FINA304/BUSN306) Date: 12 December 2020 Deadline 9 January 2021, at 17.00 hours Instructions to the students: 1. Your coursework must be uploaded on Moodle by the deadline. Also you need to upload the spreadsheet with your data and calculations. Bear in mind that NO marks will be awarded to any material contained in the spreadsheet. Only the report (coursework) will be marked. No submission by email is permitted. 2. Your answer should contain a detailed description of the steps you followed for the computation, as well comments on the results obtained at each step. 3. You should give a lot of emphasis in the methodology. The results should be as illustrative as possible. You should add equations to describe the methodology used. 4. You should summarize your findings and present them in tables, graphs etc. followed by comments. 2 5. Any equations must be written using mathematical symbols. Do not write equations in excel format. You must explain what is the equation about and comment on the results. 6. You must not include any computer printout and/or printed values of any data series1 such are excel printout of data columns. Adding hard copies of such kind of material will be penalized by a 10 marks deduction. Marking  Each question in the assignment will be graded to reflect:  Understanding of risk Management concepts.  Ability to comment on the assumptions, advantages and limitations of the risk management model or theory used.  Ability to produce accurate results. THIS COURSEWORK COMBINES THE MIDTERM EXAM AND THE ASSIGNMENT AND WEIGHTS 40% TOWARD THE FINAL MARK. 1 But you may display any this kind of data in a graph. The row data should be saved in a spreadsheet and copied in the attached CD. 3 THE TASKS Go to the main page on Yahoo Finance and click on the “Dow” symbol which is below the “Get Quotes” button on the top left of the page. This will bring you to the Down Jones (^DJI) index page. On the left box select the “components”. You will see the list with the 30 largest companies by market value that make up this index. Select any two companies. Go to the share analytics page of each of the companies you have selected. Download the daily share prices for the last of 1-2 years. NB: you must make sure that the data periods (i.e. dates) in the two sets of prices are perfectly matching. IMPORTANT: Use any information contained in the set of historical prices/returns, such as the variance-covariance matrix, means etc.. to answer the questions below. 1. Calculate the historical returns of each of the two companies. Use Cristal Ball (CB) to fit the best matching distribution. Copy the CB graph in your report. Comment on how the type of fitted distribution differs from the Normal Distribution. [5 marks] 2. Assume that you have bought about $1,000,000 worth of shares in each of the two companies. Calculate the portfolio’s market risk at 99% probability for 1, 3 and 10 days into the future (starting from the next business day) using the Historical Simulation approach. [20 marks] 3. Calculate the above portfolio’s market risk at 99% probability for 1, 3 and 10 days into the future (starting from the next business day) with the use of the Values-at-Risk (VaR or structural) approach [20 marks] 4. Calculate the above portfolio’s market risk at 99% probability for 1, 3 and 10 days into the future (starting from the next business day) with the use of the Monte-Carlo approach. [20 marks] 5. In question 3 what reduction in the portfolio’s risk due to the low correlation between the returns of the two stocks? [10 marks] 6. In question 4, on which risk factor has the portfolio risk the highest sensitivity? [5 marks] 7. Compare and contrast the results in questions 2, 3 & 4. Are the results (portfolio risk) matching? If not why? [10 marks] 8. How financial options could be used to handle the risk of the above portfolio? Discuss and propose a trading strategy to reduce risk. [10 marks] http://finance.yahoo.com/ http://finance.yahoo.com/q?s=%5edji http://finance.yahoo.com/q/cp?s=%5eDJI+Components