Vidyavardhini’s College of Engineering & Technology

Department of Computer Science & Engineering (Data Science)

EXPERIMENT ASSESSMENT

ACADEMIC YEAR 2023-24

Course: AI for financial & Banking application Lab
Course code: CSDOL8011
Year: BE Sem: VIII

Experiment No.: 10

Aim: - Implementing Advanced Risk Management Techniques in Trading Algorithms.

Name:

Roll Number:
Date of Performance:

Date of Submission:

Evaluation
Performance Indicator Max. Marks Marks Obtained

Performance 5
Understanding 5
Journal work and timely submission. 10
Total 20

Exceed Expectations Meet Expectations Below Expectations

Performance Indicator
(EE) (ME) (BE)
Performance 5 3 2
Understanding 5 3 2
Journal work and
10 8 4
timely submission.

Checked by

Name of Faculty : Odilia Gonsalves

Signature :

Date :

CSDOL8011-AI for financial & Banking application Lab

 Vidyavardhini’s College of Engineering & Technology
Department of Computer Science & Engineering (Data Science)

Experiment No. 10
Aim Implementing Advanced Risk Management Techniques in Trading Algorithms.
Objective Implementing advanced risk management techniques in trading algorithms aims to
enhance the robustness, performance, and reliability of automated trading systems.
Theory Implementing advanced risk management techniques in trading algorithms involves
integrating sophisticated strategies and methodologies to effectively mitigate various
types of risks associated with financial markets. Here are some key steps and techniques
involved in this process:

Risk Identification and Assessment:

Conduct a comprehensive assessment of the different types of risks involved in trading,

including market risk, liquidity risk, credit risk, operational risk, and model risk.
Utilize historical data, statistical analysis, and scenario testing to quantify the potential
impact of these risks on trading strategies.

Portfolio Diversification:

Diversify the trading portfolio across different asset classes, sectors, geographic regions,
and trading strategies to reduce concentration risk.
Implement correlation analysis to ensure that individual positions within the portfolio
are not overly correlated, thereby reducing overall portfolio risk.

Position Sizing and Risk Allocation:

Use advanced position sizing techniques such as the Kelly Criterion, volatility-based
position sizing, or risk parity to allocate capital efficiently and manage exposure to
different assets.
Set predefined limits on the maximum allowable position size, leverage, and portfolio
concentration to control risk exposure.

Stop Loss and Risk Control Mechanisms:

Implement dynamic stop-loss orders based on volatility, price levels, or predefined risk
thresholds to limit potential losses.
Use circuit breakers and automated trading halts to prevent catastrophic losses during
extreme market events or sudden volatility spikes.

Stress Testing and Scenario Analysis:

Conduct stress tests and scenario analyses to evaluate the resilience of trading strategies
under adverse market conditions, such as market crashes, economic downturns, or
geopolitical events.
Assess the impact of extreme scenarios on portfolio performance, drawdowns, and
liquidity requirements, and adjust risk management parameters accordingly.

CSDOL8011-AI for financial & Banking application Lab

 Vidyavardhini’s College of Engineering & Technology
Department of Computer Science & Engineering (Data Science)

Real-time Risk Monitoring and Surveillance:

Develop real-time risk monitoring tools and dashboards to track key risk metrics,
including portfolio volatility, value-at-risk (VaR), margin utilization, and exposure to
specific risk factors.
Implement automated alerts and triggers to flag potential breaches of risk limits or
deviations from predefined risk management rules.

Adaptive Risk Management Strategies:

Utilize machine learning algorithms and artificial intelligence techniques to adaptively

adjust risk management parameters based on changing market conditions, volatility
regimes, and performance metrics.
Incorporate feedback loops to continuously optimize risk management strategies and
improve the effectiveness of trading algorithms over time.

Regulatory Compliance and Reporting:

Ensure compliance with regulatory requirements and industry standards related to risk
management, including Basel III regulations, MiFID II directives, and best execution
principles.
Maintain comprehensive documentation and reporting processes to demonstrate
adherence to risk management policies and procedures to regulators, investors, and
stakeholders.

Program import yfinance as yf

import pandas as pd
import numpy as np
import matplotlib.pyplot as plt

# Step 1: Data Collection

ticker = "AAPL" # Example: Apple stock
start_date = "2020-01-01"
end_date = "2024-01-01"

data = yf.download(ticker, start=start_date, end=end_date)

# Step 2: Strategy Development - Moving Average Crossover

def moving_average_strategy(data, short_window, long_window):
signals = pd.DataFrame(index=data.index)
signals['signal'] = 0.0

# Create short and long moving averages

signals['short_mavg'] = data['Close'].rolling(window=short_window, min_periods=1,
center=False).mean()
signals['long_mavg'] = data['Close'].rolling(window=long_window, min_periods=1,
center=False).mean()

# Generate signals
signals['signal'][short_window:] = np.where(signals['short_mavg'][short_window:] >
signals['long_mavg'][short_window:], 1.0, 0.0)

CSDOL8011-AI for financial & Banking application Lab

 Vidyavardhini’s College of Engineering & Technology
Department of Computer Science & Engineering (Data Science)

# Generate trading orders

signals['positions'] = signals['signal'].diff()

return signals

# Step 3: Backtesting with Risk Management

def backtest_with_risk_management(strategy, initial_capital=100000, risk_percentage=0.02):
positions = pd.DataFrame(index=strategy.index).fillna(0.0)

positions['signal'] = strategy['signal']

# Initialize portfolio with initial cash

portfolio = pd.DataFrame(index=data.index)
portfolio['initial_cash'] = initial_capital
portfolio['cash'] = initial_capital
portfolio['holdings'] = 0.0

for i, row in strategy.iterrows():

if row['positions'] == 1.0: # Buy signal
available_cash = portfolio.loc[i, 'cash']
target_allocation = available_cash * risk_percentage
target_price = data.loc[i, 'Close']
num_shares_to_buy = int(target_allocation / target_price)

# Update positions
portfolio.loc[i:, 'holdings'] += num_shares_to_buy * data.loc[i:, 'Close']
portfolio.loc[i:, 'cash'] -= num_shares_to_buy * target_price

elif row['positions'] == -1.0: # Sell signal

portfolio.loc[i:, 'cash'] += portfolio.loc[i, 'holdings']
portfolio.loc[i:, 'holdings'] = 0.0

# Calculate total portfolio value

portfolio['total'] = portfolio['cash'] + portfolio['holdings']

# Calculate returns
portfolio['returns'] = portfolio['total'].pct_change()

return portfolio

# Step 4: Performance Evaluation

def evaluate_performance(portfolio):

# Calculate final capital value

final_cash = portfolio['cash'].iloc[-1]

# Print performance metrics

print('Final Capital Value:', final_cash)
print('\n')

CSDOL8011-AI for financial & Banking application Lab

 Vidyavardhini’s College of Engineering & Technology
Department of Computer Science & Engineering (Data Science)

# Plotting
plt.figure(figsize=(10, 6))
plt.plot(portfolio['total'], label='Total Portfolio Value')
plt.legend()
plt.title('Portfolio Value Over Time')
plt.xlabel('Date')
plt.ylabel('Portfolio Value')
plt.show()

# Step 5: Putting it all together

short_window = 40
long_window = 100

signals = moving_average_strategy(data, short_window, long_window)

portfolio = backtest_with_risk_management(signals)
evaluate_performance(portfolio)

Output Final Capital Value: 99387.24989318848

Conclusion

CSDOL8011-AI for financial & Banking application Lab