A PRESENTATION ON

VALUE AT RISK (VaR) STUDIES OF INDUSTRIAL SECURITIES PORTFOLIO
A METHODOLOGY FOR OPTIMIZING PORTFOLIO RISK USING CRYSTAL BALL PRESENTED BY
NAMAN SWAROOP 057515 Mob:9358423378

Value at Risk

INTRODUCTION
For Investors, risk is about the odds of losing money. What is my worst case scenario? How much could I lose in a really bad month?
Value at Risk

INTRODUCTION
“VAR summarizes the worst case loss over a target horizon with a given level of confidence.” - Philippe Jorion “Value at risk measures the worst case expected loss that an institution can suffer over a given time interval under normal market conditions at a given confidence level. It assesses this risk by using statistical and simulation models designed to capture the volatility of assets in a portfolio.” -Cormac Value at Risk Butler

INTRODUCTION
A portfolio is a bundle or combination of individual assets or securities. VaR of a portfolio is simply

σXz
σ:standard deviation of portfolio z: z score value at a given confidence. eg:2.33 @ 99%
Value at Risk

VaR CALCULATION METHODS
Three methods: 3. 4. HISTORICAL METHOD VARIANCE-COVARIANCE METHOD 5. MONTE-CARLO SIMULATION

Value at Risk

MONTE CARLO METHOD(MCS)
Historical/Implied Data

Model parameters

STOCHASTIC MODEL

FUTURE PRICES

Securities Model

Full Valuation

Portfolio
Positions

Distribution Of values

Value at Risk

CRYSTAL BALL (CB)& MCS
CB WORKING MODEL

Value at Risk

PROBLEM IDENTIFICATION
How investors can lower the risk in their equity investment portfolio by sensible diversification ?

Value at Risk

OBJECTIVES
• To calculate the Value at Risk of the industrial securities portfolio, so that, the investor can invest in modified Sensex portfolio by choosing similar alternative securities within ‘A’ group securities in terms of volatility with his own level of risk taking ability. To understand the awareness of institutional investor and the technique used by those to manage risk adjusted return.
Value at Risk

NEED OF THE STUDY
An investor invests on the basis of his risk taking ability. This study is to develop a methodology to measure or to calculate the possible loss in worst case. If the investor is ready to take that much of the risk, then only he will invest in that portfolio.
Value at Risk

RESEARCH METHODOLOGY
• • • • • • • NATURE OF THE STUDY: Analytical Study SAMPLING TECHNIQUE: Judgmental Sampling (Sensex) SAMPLE Primary Data: A web based questionnaire was developed for professionals working in the field of Risk Management. Sample Size : 3 Secondary Data: The secondary data (share prices) is collected from www.bseindia.com SOFTWARE USED FOR STATISTICAL CALCULATION MS Excel 2003 Crystal Ball 5.1 Student Edition

Value at Risk

ANALYSIS
ASSUMPTIONS
– Dividend is not taken into consideration. – The Scrip’s rate of return follows a normal distribution. – The holding period for VaR calculation is one day.

Value at Risk

ANALYSIS
• STEP ONE
– Data Adjustment
BAJAJAUTO(dummy data)
3500 3000 2500 price 2000 1500 1000 500 0 1 176 351 526 701 876 1051 1226 1401 1576 1751 Obs e rvations 3500 3000 BAJAJAUTO

ADJUSTMENT
Price

2500 2000 1500 1000 500 0 1 176 351 526 701 876 1051 1226 1401 1576 1751 Observations

– Capital Gain
(P1-P0) / P0

– Average Rate of Return – Standard Deviation (Volatility) – Correlation Matrix Value at Risk

ANALYSIS
• STEP TWO
– Sorting – Formation of Portfolio
Portfolio 1 Small Standard Deviation
GLAXO BAJAJAUTO ABB HINDALC0 SBIN RELIANCE HDFCBANK ACC CIPLA SIEMENS

Portfolio 2 Portfolio 3 Medium Standard Deviation High Standard Deviation
RANBAXY GRASIM DRREDDY SUNPHARMA ONGC ORIENTBANK DABUR GAIL BHEL MTNL IPCL INFOSYSTCH BPCL SatyamAdj SAIL WIPRO HCLTECH VSNL ZEETELE ICICIBANK

Value at Risk

ANALYSIS
• STEP 3
– Portfolio Values are inserted – Crystal Ball is invoked

• STEP 4
– Assumptions, Decision Variables & Forecast Cells are defined. – MODELLING EQUATION
Return = expected return of portfolio 1*investment in portfolio 1 + expected return of portfolio 2*investment in portfolio 2 + … + expected return of Portfolio N*investment in portfolio
Value at Risk

ANALYSIS
• STEP 5
– SIMULATION – The Crystal Ball generates the descriptive statistics.

Demonstration
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FINDINGS
QUESTIONNAIRE

NAME
1 2 3

DESIGNATION

ORGANISATION

SWAMI DAYAL NISARG A. DESAI SACHIN BANSAL

FINANCIAL ANALYST / DENA BANK CREDIT OFFICER MARKET RISK ICICI BANK LIMITED ANALYST MANAGER - RISK CREDIT SUISSE ANALYTICS

Value at Risk

FINDINGS
QUESTIONNAIRE: Financial Institutional Investors • Measuring risk is one of the crucial activities carried out by these financial institutions. • These institutions have group of experts for the purpose of calculating VaR. • As per the response from the designed questionnaire we have seen the that , Value at Risk is being used by the financial institutions. It is very specialized field of activity, utilized by experts. • For the purpose of calculation of VaR, they are using almost all possible method of calculations. Value at Risk

FINDINGS
• PORTFOLIO ANALYSIS VaR is calculated at 99% confidence 95% confidence

Value at Risk

FINDINGS:VaR @ 99 %
PORTFOLIO 1

VALUE @

RISK
Value at Risk

FINDINGS:VaR @ 99 %
PORTFOLIO 2

VALUE @

RISK
Value at Risk

FINDINGS:VaR @ 99 %
PORTFOLIO 3

VALUE @

RISK
Value at Risk

FINDINGS:VaR @ 95 %

Value at Risk

FINDINGS: MODIFIED PORTFOLIO
We Repalced ICICI with PNB in portfolio 3 and run the simulation.

VALUE @

RISK

Value at Risk

FINDINGS: TABLE OF RESULTS
PORTFOLIO STANDARD DEVIATION PORTFOLIO 1 2,959.92 PORTFOLIO 2 3,042.05 PORTFOLIO 3 5,676.53 PORTFOLIO 3* 4,867.49 MINIMUM (Rs) -9,032.22 -8,474.52 -17,278.36 -14,254.34 MAXIMUM (Rs) 10,638.20 10,712.97 20,330.57 17,327.22 MEAN (Rs) 204.54 221.81 393.11 685.78

Modified Portfolio

Value at Risk

RECOMMENDATIONS
While maintaining the return it is possible to reduce the VaR in a portfolio by substituting with a less volatile security from a group instead of most volatile sensex security. Such improvement in the risk adjusted return on capital (RAROC) can be achieved in each of the 3 above mentioned portfolios. It is for each institutional investor to restructure his equities portfolio in accordance with his objectives using the tools and techniques that have been demonstrated in this project work. Value at Risk

CONCLUSION
The methodology used to optimize the portfolio risk by measuring value at risk of the portfolio is very useful in real life situation also, as it is based on Monte Carlo Simulation. An investor can easily identify his preferred portfolio by knowing the worst case loss. The calculations are based on real life data; hence it presents a true picture of calculations and behavior of portfolio value.
Value at Risk

LIMITATIONS
Crystal Ball Time and hardware restrictions made it extremely difficult to examine a large number of equity substitutions for observing there effect on risk and return .

Value at Risk

LIMITATIONS
Questionnaire Number of responses to the questionnaire was very small owing to the necessity of inviting responses from experts in this area of specialization. Moreover this time of the year the expert are tied-up with preparation of annual accounts for the year ended 31st march and so getting responses from them was extremely difficult.
Value at Risk

Value at Risk

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