FIN5MRM: Market Risk Management (2016, Semester One)
Group Assignment
Due date: 25 May 2016
Each group consists of one to three students. Send the list of group members with your names and student IDs to Mr Mingyi Li (Mingyi.Li@latrobe.edu.au) by email by 6 May 2016. A group name will be randomly assigned by Mr Mingyi Li.
Suppose that you own, on 1 January 2016, a portfolio worth $10 million AUD consisting of investments in four stocks traded on domestic and international markets. Appendix provides the details of the portfolio allocation for each group, including the trading symbol and the trading market of each stock and the Australian dollar (AUD) value of each holding.
Daily closing prices of stocks can be downloaded from yahoo finance
(http://au.finance.yahoo.com/). Consider a historical sampling period of three year (from 1st January 2013 through 31st December 2015). Each group needs to submit a written risk report for your portfolio and a supplementary Excel spreadsheet to Mr Mingyi Li
(Mingyi.Li@latrobe.edu.au) by 25 May 2016, which should include the following parts:
Part A1: Calculate the 95% daily portfolio VaR using the basic methodology of the historical simulation approach. (2 marks)
Part A2: Calculate the 95% daily portfolio VaR using the exponential weighting methodology of the historical simulation approach. (2 marks)
Part B1: Calculate the 95% daily VaR for the portfolio using the model-building approach. Generate a VaR report for the portfolio based on the model-building approach, which should contain the following elements: (3 marks)
(i). An analysis of the diversification effect (undiversified VaR and diversified VaR) (ii). Marginal VaR
(iii). Component VaR
Part B2: What is relationship between marginal VaR and incremental VaR? (1 mark)
Part B3: On average, what is the relationship between component VaR and individual VaR for a particular position? (1 mark)
Part B4: Marginal VaR in Part B1 are useful tools for risk management. Discuss how to change the portfolio positions to minimizing the portfolio VaR while keeping the portfolio fully invested. Generate a new VaR report based on the risk-minimizing positions. (2 marks)
Part C1: Implement backtesting procedures to evaluate the portfolio VaR determined in Part A1, Part A2 and Part B1, respectively, with unconditional coverage. (2 marks)
Part C2: Implement backtesting procedures to evaluate the portfolio VaR determined in Part A1, Part A2 and Part B1, respectively with conditional coverage. (2 marks)
Part C3: Backtesting is usually conducted on a short horizon, such as daily returns. Explain why. (1 mark)
Part D: Contrast and compare your findings in Part C1 and Part C2 and further comment on the performance of the market risk measurement approaches used in Part A1, Part A2 and Part B1. (4 marks)
The assignment is expected to be done in a professional manner and will be graded under those expectations. This means that grammar, spelling, and overall presentation will have an influence on the score.

Appendix: Portfolio allocation for each group, including trading symbols of the five stocks and their holdings in Australian dollar (AUD)
Stock 1 Stock 2 Stock 3 Stock 4
Group 1
Stock Symbol CBA.AX PTM.AX MMM AAL.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 2 2 2 4
Group 2
Stock Symbol WBC.AX FDC.AX ABT ABF.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 3 1 2 4
Group 3
Stock Symbol ANZ.AX ANN.AX ABBV ADM.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 5 2 1 2
Group 4
Stock Symbol BHP.AX CGF.AX ACN AGK.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 3 3 2 2
Group 5
Stock Symbol NAB.AX HGG.AX ACE AMEC.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 1 3 1 5
Group 6
Stock Symbol TLS.AX TAH.AX ACT ANTO.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 3 2 4 1
Group 7
Stock Symbol WES.AX FLT.AX ADBE ARM.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 2 3 1 4
Group 8
Stock Symbol CSL.AX DUE.AX ADT AU.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions)
Group 9 3
1
5
1
Stock Symbol WOW.AX EGP.AX AES AV.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 3 4 1 2
Group 10
Stock Symbol WPL.AX ILU.AX AET AZN.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 4 4 1 1
Group 11
Stock Symbol MQG.AX TWE.AX AMG BA.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 4 3 2 1
Group 12
Stock Symbol RIO.AX MFG.AX AFL BARC.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 3 3 3 1
Group 13
Stock Symbol SCG.AX QUB.AX A BATS.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 4 2 2 2
Group 14
Stock Symbol WFD.AX DMP.AX GAS BG.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 3 1 1 5
Group 15
Stock Symbol AMP.AX IFL.AX APD BLND.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 3 2 1 4
Group 16
Stock Symbol TCL.AX ABC.AX ARG BLT.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 1 3 5 1
Group 17
Stock Symbol BXB.AX SKI.AX AKAM BP.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 2 2 2 4
Group 18
Stock Symbol QBE.AX ORA.AX AA BRBY.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 3 2 1 4
Group 19
Stock Symbol SUN.AX PRY.AX ALXN BSY.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 2 3 1 4
Group 20
Stock Symbol AMC.AX SGM.AX ALLE WEIR.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 3 2 1 4
Group 21
Stock Symbol IAG.AX BSL.AX AGN CCL.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 5 1 2 2
Group 22
Stock Symbol RHC.AX SPO.AX ADS CNA.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 2 3 3 2
Group 23
Stock Symbol ORG.AX PPT.AX ALL CNE.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 2 3 2 3
Group 24
Stock Symbol RMD.AX IOF.AX ALTR CPG.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 2 3 1 4
Group 25
Stock Symbol OSH.AX WOR.AX MO CPI.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 3 1 3 3
Group 26
Stock Symbol SYD.AX CAR.AX AMZN CSCG.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 4 2 2 2
Group 27
Stock Symbol GMG.AX REC.AX AEE DGE.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 3 2 3 2
Group 28
Stock Symbol SGP.AX DLX.AX AEP EMG.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 1 3 4 2
Group 29
Stock Symbol NCM.AX SKC.AX AXP ENRC.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 3 2 3 2
Group 30
Stock Symbol AZJ.AX FXJ.AX AIG ESSR.L
[Market] [Australia] [Australia] [US] [UK]
(AUD millions) 1 2 3 4