Portfolio about Five Assets in Performing Market Risk VAR Analysis

Portfolio about Five Asset
Name
Course
Instructor
Institution
Date
Based on a 5 (five) asset portfolio from the same industry, perform Market risk VAR analysis (Variance-Covariance, Historical Simulation and Monte-Carlo), present your results and discuss the findings.
Background
The use of historical information to make predictions about the future volatility of a portfolio is classified into mainly three categories: variance-covariance (matrix) methods, historical simulation methods and Monte Carlo simulation methods. These methods measure of the risk of loss from investments under normal market conditions for five stocks that are banking institutions. The maximum loss of the five-asset portfolio is estimated using the three approaches.
Variance-Covariance
The portfolios with minimal variance are the portfolios with various assets that have a minimum possible risk for a given level of profitability, where these types of portfolio link the risk and profitability and reflect the benefits of diversification. The Variance and Standard deviation corresponds to the volatility (risk) of the returns of a security and are calculated according to the deviation from the average profitability (Allen, 2012). The covariance measures the relationship between movements in asset (stock) prices for the five selected stocks. When considering the covariance and correlation there is an assumption that the returns of individual securities are related to each other. The analysis focuses on the banking stocks of Bank of America Corporation, Citigroup Inc, Goldman Sachs Group, JP Morgan Chase and Wells Fargo from 2nd January 2019 to 28th February 2019 for 40 days.
Investment

10,000

Mean Return

0.30%

Portfolio Sigma

1.27%

 

 

Mean Investment

$10,029.52

Sigma of Investment

$127.29

 

 

Cutoff

$9,733.41

Cumulative PDF

0.01

1 Day VAR on 1%

$266.59

10 Days VAR on 1%

$843.03

 

BAC

Citigroup

Goldman Sachs

JP Morgan Chase

Wells Fargo

Average

0.3917%

0.4573%

0.3436%

0.1272%

0.1563%

Standard deviation

0.01625

0.01549

0.01884

0.01097

0.01168

Variance

0.00026

0.00024

0.00035

0.00012

0.00014

Based on the variance and covariance results for the five stocks the 1 day VAR is $ 266.59 and the 10 Days VAR at 1% is $843.03. There was an assumption that the initial investmen...