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Question 1
Identify Risk Factors for your portfolio
Uncertainty of returns from 3 assets (market risk)
Correlation between 3 assets
Standard deviation
We can change a variable to see how it affects risk
Stress shocks
Setting all the correlation to 1
If the 1
st
percentile of return is .99
if the standard deviation = .06
If correlation = 1 for all assets,
Absolute VaR =
$498,915.73
VaR =
$499,821.33
If 1
st
percentile of return = .99
VaR = $100905.87
If standard deviation = .06
VaR = $13050793
Question 2
1. I find it interesting that efficiency of today's statistical risk models isn't clear, and that it is debatable as
to whether they are in need of supplementing, or if they are useful alone.
2. Stress testing used in implementations of risk based capital doesn't supplement or complement
statistical risk models, they provide a shortcut.
3. Today's statistical risk models need to test large shifts rather than nonlinearities, because exposures in
large movements are easily missed.
4. VaR calculations are found to be a useful supplement to estimate error.
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 Fall '10
 Gupta
 Management

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