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Value at risk - Assignment Example

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In the paper below, analysis of four portfolio shares of 4 different companies in the stock exchange are going to be evaluated and the value at risk is calculated. Since no investors or companies wish to get losses while dealing in shares (Jorion 2007, p.2). …
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Value at risk
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Download file to see previous pages Value at risk provides a way to depict the probability of on making losses. In the paper below, various methodologies are going to be used to calculate the value at risk of the 4 portfolio shares for the given year. The methodologies that would be use include: The historical simulation, the Monte Carlo simulation and the parametric approach. In each of the following, there are various crucial steps that would be used in calculation of value at risk in the value at risk to come up with conclusions for the various portfolio shares.
The structure of the paper would mostly be description based of the following approaches mentioned above. While calculating value at risk in a specific methodology, the following will need to be observed carefully. In each methodology, a description on how one is going to arrive at the specific value at risk for the given portfolio is going to be calculated and even a histogram plotted where necessary. In addition, one would be expected to comment on the important steps used and give a final verdict of the advantages and the disadvantages of using the given method. After calculating value at risk using the three approaches mentioned above, then a discussion will be conducted to compare the differences in the three methods while attempting to get the value at risk (Jorion 2007, p.6). Then the paper would end with a conclusion that would comment on the value at risk of the 4 portfolio shares used.
cause the end product of any of the two approaches will be to estimate value at risk, often the most important points remain on whether results calculated by other different methods may differ from each other. In addition, one would still like to know which approach is the most reliable in estimating value at risk. Generally, intuitiveness shows that non-parametric methods, like the historical simulation as well as the parametric methods i.e. Risk metrics, will often yield the same Value at risk if historical returns data will be normally distributed. In addition, empirical studies also shown that the given predicted results from different Value at risk methodologies are often not close (Choudhry 2006, p.7. The historical simulation often does not impose a given distributional assumptions, sometimes it can be limited when used to forecast the range of certain portfolio value changes since it incorporates no volatility updating plus it produces inaccurate values once the future succumbs to extreme events. In contrast, the Risk metrics, is relatively easy to put in practice. Nonetheless, a given empirical observations on a given returns of financial instruments often do not exhibit the given normal distribution and hence the method do not fit data with certain heavy tails. Background to the data sample The following 4 companies have been chosen to have the analysis of their value at risk of their share portfolios calculated. They are Aggreko PLC, Admiral Group PLC, Amec PLC and the Anglo- American PLC. The Aggreko PLC is a very large international company that deals with supplying temporary power plus dealing with temperature control too. Admiral Group PLc is a large motor insurance company that has a head office at Wale, Cardiff . The Amec PLC is hence a global ...Download file to see next pagesRead More
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