- Recall the VaR (value at risk) example we did in class (BBKB Chapter 2 Excel Example
uploaded on D2L). In that example, we conducted a simulation of a 1-month VaR of $1M
portfolio, assuming 1% average monthly return and 5% standard deviation of monthly
return. Please explore the spreadsheet to recall the details, and also recall that a random
monthly return can be generated by Norminv(Rand(),1%,5%) function, which can be seen
from the spreadsheet. Now assume that you manage a large portfolio with the current
value of $50 million, and also assume the monthly return follow a normal distribution with
mean of 1% and standard deviation of 4%. You generate monthly return for 12-month
period, and then calculate the portfolio value at the end of the 12th month. (Hint: add 11
more columns to generate monthly return for all 12 months, and the end portfolio value is
simply the beginning portfolio value multiply by 1+monthly return for all months, i.e.,
multiple 12 times). You then run this simulation for 5000 times, and then rank the end
portfolio value from the lowest to the highest (1st to 5000th).
a) Report your 12-month portfolio VaR estimate, given a 95% confidence level. Save
your results in “Sheet1” tab.
b) Now set the standard deviation of monthly return to 3% (instead of 4%), and report
your new 12-month portfolio VaR, and save your results in “Sheet2” tab. Is your new
VaR higher or lower than the one in a)? Attach your spreadsheet. - Read article “Value at risk: uses and abuses” posted on D2L (Reading #4), and then write
a brief summary of the article (about 1 page single spaced). In your summary write-up,
focus on the four cases (P&G, Barings, Orange County, and Metallgesellshaft), and
address the following: 1) Would VaR have helped in those cases and what are the VaR
limitations? 2) What are the key points of the article?
Sample Solution
