VaR and Risk Budgeting in Investment by Edu Pristine

Author of lecture VaR and Risk Budgeting in Investment

Edu Pristine

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... down to analysis of management style (Active/Passive) and then calculate the VaR at the individual security level as well would be called Risk Budgeting. For investment firms with small investment horizon ...

... Leverage High Low Risk Measures VaR, Stress Testing Asset Allocation, Tracking Error Risk Controls ...

... Investment Strategy – To determine long term strategic asset allocation. Balance of Risk and Return. Amounts to be invested in different asset classes ...

... like liquidity and low transparency. Loss due to stress sale. Value of assets difficult to assess in such situations ...

... we measure risk in comparison to a benchmark (For example, when we say that our portfolio might underperform NASDAQ by $10 mn over the next week – If we had investment same amount in our portfolio as compared to the benchmark). Policy Mix Risk: The risk associated with choosing a particular investment policy ...

... breach has to be analyzed. Different investment styles of managers makes it mandatory to manage risk at portfolio level rather than micro-managing the fund. Environmental factors and volatility of the market has to be measured to reason out the increase in VaR To design Investment Guidelines. ...

... Now, assuming a joint normal distribution of returns, the investor comes up with the optimum portfolio with expected return of 12% and total risk (standard deviation) of 10.3%. This can be achieved by allocating 60%, 7.7% and 32.3% to U.S stocks, U.S bonds and non U.S bonds respectively. The total risk can be measured by 95% annual VaR i.e. 1.645*10.3%*$100= $16.9 million. This risk budget can ...

... Then, individual risk budgets would be $8.83 million. Doing so, the total risk should be $15.3 million. Sqrt(8.8322+8.8322+2*8.83*8.83*0.5) = $15.3 million. Again, the sum of the individual risk budgets is greater than the total risk budget of $15.3 million ...

... expects that the return volatility of the portfolio to be 12%. His client has asked him to another $200 mn of exposures in either rice or corn futures. The return volatility for the two positions will be 10% ...