RMIT Classification: Trusted RMIT Classification: Trusted RMIT Classification: Trusted BAFI1026 Risk Management- Assessment 3 – Individual Risk Management Report INSTRUCTIONS Please submit a word or pdf file with both your name and student on the first page and then submit a supporting Excel file containing your workings for all of the reported analysis. Assessment (individual): 50% towards your total mark. Word limit 3000 words. Every 100 words over the limit will be penalized with -1 mark. The figures, references and appendix are not included when counting the number of words. Account and Portfolio Creation 1. Create an account (with your real first & surname) on www.marketwatch.com 2. Create two watchlists of Portfolios A and B on Thursday, 16th September 2021 3. Create a watchlist of Portfolio A ($400,000) consisting of TWO stocks. a. Choose One stock from the S&P500 index plus Amazon.com (AMZN) stock. b. Make the number of shares for AMZN equal to “Last two digits of your student number” if these two digits are larger than 19. c. Make the number of shares for AMZN equal to “First two digits of your student number” if your last two digits are smaller than or equal to 19. d. Example: For student S7777777, you need to hold 77 shares of AMZN in your Portfolio A For student S6660011, you need to hold 66 shares of AMZN in your Portfolio A e. Determine the weight and number of shares for the other stock you chose in step a. f. You have USD 400,000 for Portfolio A. 4. Create a watchlist of Portfolio B ($1 million) consisting of Four stocks from the S&P 500 a. Choose any Three stocks from the S&P500 index plus Tesla (TSLA)[footnoteRef:1] [1: The three stocks in portfolio B need to be different from the stocks in portfolio A. Also, make sure at least one stock has sufficient information of option quotation.] b. Make the number of shares for TSLA equal to “Last three digits of your student number” if they are larger than 99. c. Make the number of shares for TSLA equal to “First three digits of your student number” if your last two digits are smaller than or equal to 99. d. Example: For student S7777777, you need to hold 777 shares of TSLA in your Portfolio B For student S6660011, you need to hold 666 shares of TSLA in your Portfolio B e. Determine the weights and shares for the rest of the stocks you chose in step a. f. You have USD 1 million for Portfolio B. 5. Take screenshots of your portfolios and the necessary information in all sections. Make sure you attach them in the Appendix. Assignment Overview: The goal of this individual assignment is to gain a better understanding of the portfolio investment (in the US stock market) and risk management process. Below are the tasks to be completed in this assessment: · Your goal is · to set up and manage two stock investment portfolios A and B, · to hold these portfolios from Thursday, 16th September 2021 until – Friday, 1 October 2021. · to identify and manage the portfolio risk, and · to communicate your investment and risk management process in using a professional report. Guideline for Investing and Calculations Portfolio Investment Strategy Since the trading game is only for the short term, the investment strategy is to generate high short-term growth in the value of the portfolios over the holding period. Marking Guide Your report must include the following sections: 1. Trading philosophy: (5 marks) Give an overview of your trading philosophy. You should identify yourself as a value or growth investor or a mixture of both. 2. Portfolio construction: (10 marks) Present your initial portfolio, including information on why you have invested in the stocks in your initial portfolio. a. News and the overall market and macroeconomic condition (3 marks) b. The initial weightings of the portfolio and the rationale for that composition (7 marks) 3. Risk identification: (25 marks) In this part, you should discuss the risk profile of your portfolios. On Friday, 24 September 2021, use daily stock prices since 1st October 2017 to calculate the VaR. The discussion should include the following points: a. Calculation and discussion of the five-day 99%-Value at Risk of your portfolio A using model- building approach. (7 marks) b. Calculation and discussion of the five-day 99%-Value at Risk of your portfolio B using a historical simulation approach. (10 marks) c. Discuss the performance of VaR based on your calculation approaches in (a) and (b), VaR results and actual five-day returns (Monday, 27th September 2021 – Friday, 1 October 2021). (8 marks) 4. Hedging using Futures: (25 marks) a. On Tuesday, 21 September 2021, how will you use the E-Mini S&P 500 Future contract to hedge your Portfolio B position against a possible market decline? Provide calculation as necessary. (16 marks) b. a review of your hedging strategy based on the comparison between the portfolio performance with hedging and the portfolio performance without hedging for the holding period between Tuesday, 21 September and Friday, 1 October 2021. (9 marks) 5. Hedging using Options: (25 marks) a. On Wednesday, 29 September 2021, how will you use the option contract to hedge one of your three stocks in Portfolio B[footnoteRef:2]. You need to determine which option you need to use (i.e., the type of option, appropriate strike price etc.). Provide justification for your decision. (8 marks) [2: You can choose any stock from the three stocks you selected for Portfolio B.] b. Calculate the European option price using the option specification you chose in the previous section (i.e., strike price, expiration date, etc.). (11 marks) c. Provide a review of these option prices based on the comparison between the European option price from your calculation and the actual option price you observed in the market. (6 marks) 6. The professionalism of the report. (e.g., Usage of professional Figures and Tables.) (10 marks) Total=100 marks Note: · The report will include VAR calculations which will require you to use Excel. Therefore, though the result of calculations should be discussed in the report, you should submit a separate Excel file to Canvas to show your detailed calculations. · This instruction includes suggestions on items to include in the report, more information for parts you think are important may be included as you feel necessary, keeping in mind the word limit. Additional Resources: To help you construct your portfolio: 1. Information on value investing can be found here: https://www.investopedia.com/university/stockpicking/stockpicking3.asp 2. Information on growth investing can be found here: https://www.investopedia.com/university/stockpicking/stockpicking4.asp Futures and Options Data 1. Futures contract on the S&P500 can be found here https://www.marketwatch.com/investing/future/sp%20500%20futures 2. Options contract for, for example, Facebook can be found here. https://www.marketwatch.com/investing/stock/fb/options Other data: 1. Historical stock prices can be downloaded from open access websites like yahoo finance such as the following link: https://finance.yahoo.com/quote/FB/history?p=FB&.tsrc=fin-tre-srch for Facebook historical prices. You find a proxy for risk-free rate here 3-month treasury bill https://fred.stlouisfed.org/series/TB3MS 2. Annual return of the S&P500 can be found here https://ycharts.com/indicators/sandp_500_total_return_annual 3. A proxy for risk-free rate such as 3-month treasury bill can be found here https://fred.stlouisfed.org/series/TB3MS CAPM and Beta helpful videos: 1. Capital Asset Pricing Model (CAPM) https://www.lynda.com/Finance-Accounting-tutorials/Capital- asset-pricing-model-CAPM/565365/710964-4.html 2. What is Beta https://www.lynda.com/Finance-Accounting-tutorials/What-beta/565365/710968-4.html BAFI1026 Risk Management_Assessment 3 List of Frequently Asked Questions Question 1: The assignment 3 briefly states that we need to "Create two watchlists of Portfolios A and B on Thursday, 16th September 2021". The date has passed. What should I do now? Is there any way to switch the required date to 16th Sept? Answer: The specified dates are used for you to collect historical data (stock prices, futures and option prices, etc), not the dates on which you must perform the task. Therefore, you can push back the dates to collect necessary historical data. You can perform the tasks at any time before the submission date. As an illustration, this is the link to the historical daily prices of the AMZN stock. Download AMZN Data | Amazon.com Inc. Price Data | MarketWatch Further details can be found in the instruction recording that has been uploaded under the Assessment 3 specification. Question 2: I would like to ask regarding the Final Assignment for Portfolio A and B. Do I need to have my shares reach exactly up to USD$400,000 and USD$1,000,000 respectively? Or can they add up close to that amount, say, $399,958 and $999,958? Answer: Since the shares can’t be bought in fraction, a tiny variation from the specified budget is acceptable. Question 3: I would like to ask, specifically for the value of the E-Mini S&P 500 Future, are we encouraged to use the number of points the S&P 500 closed with on that day or are we supposed to use the E-Mini S&P 500 Future Continuous Contract closing price? The difference is negligible. Answer: The E-mini S&P 500 Futures Continuous Contract closing price will be used. Question 4: Do we use the initial value of Portfolios A and B ($400,000 and $1,000,000 respectively) to calculate VaR in Question 3? Answer: No, you must use the value of your portfolios on the dates specified in Question 3 to calculate VaR. Question 5: Do I need to calculate beta, or can I copy this value from Yahoo Finance? Answer: Yes, you are required to collect historical data to calculate beta. The article at this link https://www.investopedia.com/ask/answers/102714/how-do-you-calculate-beta-excel.asp offers insights into how to calculate beta in Excel. Alternatively, you can derive beta by collecting inputs for the CAPM model and run regression. Inputs are risk free rate, risk premium (= market return- risk free rate) and stock return. However, you are supposed to self-explore to do this task because this has been covered in the prior finance courses. You should use adjusted closing prices. Question 6: I would like to ask, if I were to opt for an option. Are you able to give me a hint on how I can choose an expiration date for the option? I would suggest you choose the option with an expiry date being the last date of your hedging period. If there is no such date available, you might consider the closest date possible (usually longer than the specified date). Since most of the traded options are American-style options, they can be executed at any time over their life. This means for the hedging purpose you can use a longer expiry date option and exercise it (only in your favour) on the specified hedging date. Question 7: Can I use available Implied Volatility (IV)