Lezione 3

Economia del mercato mobiliare

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VALUE AT RISK
• VaR is the percentile of a distribution the
observations (i.e. the distribution of portfolio
returns)
• If we assume that returns are normally distributed,
the Value at Risk is calculated simply as the a-th
quantile (where a is the significance level) of a
normal distribution with parameters μ and s2 .
• So calculate μ and s2 and then use the function
“NORM.INV” of excel to calculate the VaR.
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5% VaR for normal returns

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5% VaR from observational data

The normal distribution is a very optimistic hypothesis (it doesn’t

happen in real world), this is the reason why VaR is
higher than the empirical one.
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Calculating the Empirical VaR

• In this case we don’t make any assumption about
distribution of portfolio returns
• Simply create the historical histogram plot of
portfolio returns.
• Don’t worry: Excel does this operation
“automatically” (you don’t have to do that by
yourself!) when you calculate the Excel’s function
“PERCENTILE”.
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Take home messages

• Arithmetic average for forecasting; geometric
average for ex post performance evaluation
• Return distributions are not Normal distributions
• Yet…almost all MPT rely on such an assumption
• So be aware
Diversification and Risk
Why Diversification Works.
Why Diversification Works, II.
 Mean variance criterion

Se le distribuzioni dei rendimenti sono normali, l ’ investitore avverso al

rischio, noti i due parametri, è in grado di scegliere tra due o più attività rischiose
seguendo alcune semplici regole:

1. se E(ri ) > E(rj ) e se s i = s j AF

AF ! AFj AF
AFii ipreferito
preferito AFjj

2. se E(ri ) = E(rj ) e se s i > s j AF

i! AF
AFi non preferito AFj
j

3. se E(ri ) > E(rj ) e se s i < s j AFi ! AFj

AFi preferito AFj

4. se E(ri ) > E(rj ) e se s i > s j AFi ? AFj

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The mean-variance criterion

A. Is based on the normality assumption of the asset

returns
B. States that if two assets have the same expected
return, the investors should choose the one with the
lower standard deviation
C. Is based on the assumption that the relation
between risk and expected return is positive
D. The first and the second option are correct
E. All answers are correct
More on Correlation and the Risk-Return Trade-Off
 Dalla teoria di portafoglio alla teoria dei mercati

Frontiera efficiente in presenza di un titolo privo di rischio (risk-free asset)

E(rp)

M
CML Capital Market Line
Ü Serve per prezzare portafogli
A efficienti
rf

sp

E (rm ) - rf
E (rp ) = rf + ´s p
sm
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The optimal risky portfolio can be identified by

finding:

I. The minimum-variance point on the efficient frontier

II. The maximum-return point on the efficient frontier
and the minimum-variance point on the efficient
frontier
III. The tangency point of the capital market line and
the efficient frontier
IV. The line with the steepest slope that connects the
risk-free rate to the efficient frontier
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Take home message

• STD & correlation matrix from historical data or scenario
analysis
• Contribution of an asset to Portfolio variance depends on its
correlation with other assets in the portfolio (as well as its
own variance)
• The power of diversification: as long as assets are less than
perfectly correlated
• Efficient frontier of risky assets (definition) and the rational
risk averse investor
• The inclusion of a risk free asset in the Markowitz world: CML