Historical risk assessment of a balanced portfolio using Value-at-Risk [electronic resource].

by Malfas, Gregory P.

i Calculation of the Value at Risk (VaR) measure, of a portfolio, can be done using Monte Carlo simulations of that portfolio’s potential losses over a specified period of time. Regulators, such as the US Securities and Exchange Commission, and Exchanges, such as the New York Stock Exchange, establish regulatory capital requirements for firms. These regulations set the amount of capital that firms are required to have on hand to safeguard against market loses that can occur. VaR gives us this specific monetary value set by Regulators and Exchanges. The specific amount of capital on hand must satisfy that, for a given confidence level, a portfolio’s loses over a certain period of time, will likely be no greater than the capital required a firm must have on hand. The scenario used will be one of a Risk Manager position in which this manager inherited a portfolio that was set up for a client beginning in April 1992. The portfolio will have to meet certain parameters. The initial portfolio is worth $61,543,328.00. The risk manager will be responsible for the calculation of the Value at Risk measure, at five percent, with a confidence level of 95% and 20 days out from each of the 24 business quarters, over a six year period, starting in 1992 and ending in 1996.