Financial Risk Management – Worksheet 1

1 A trader opens a position in a stock on the 1st of January 2015. They buy 100 shares
at a price of £25. The trader closes the position on the 1st of April 2015 for a price of
£22 per stock.
a) What is the holding period return?
b) If the stock paid a dividend on the 1st of April of £5 per stock what would
be the holding period return?

2 A trader holds a position for one year. The initial value of the position was
£100,000,000. By the end of the year the trader expects the portfolio to be worth
£110,000,000 with a standard deviation of 20%. The risk free rate is 2%. What is the
expected Sharpe Ratio?

3 Given the following information about a portfolio value and the index it is designed
to track calculate the tracking error and information ratio:

Time 1 2 3 4 5 6 7 8 9
Portfoli 20000 21000 22000 21250 21500 21400 22500 22300 22000
o
Value($
)
Index 100 108 110 109 110 109 110 108 107

4 A £10 million stock portfolio has a daily standard deviation of the rate of return of
2%, assuming that returns are normally distributed what are the 95% and 99% 1 day
VARs?

5 A £20m stock portfolio has a yearly standard deviation of the rate of return of 15%,
assuming that returns are normally distributed what is the 95% and 99% 1 day VARs?

6 A £15m stock portfolio has a yearly standard deviation of the rate of return of 12%,
assuming that returns are normally distributed what are the 95% and 99% 10 day
VARs?

7 A £10000 stock portfolio has a monthly mean return of 3% and a daily standard
deviation of returns of 1.5%. What is the weekly 99% VAR? What is the absolute loss
in pounds at this confidence interval?
(you may assume there are 4 equally sized weeks in a month).

8 Assuming a bank has investments of £10 billion with normally distributed returns.
What is the maximum yearly volatility such that the 95% yearly VAR is no more than
£1 billion?

9 An investment project has three outcomes with 1% probability it makes a loss of

£4m with 3% probability it makes a loss of £2m and with 96% probability it makes a
gain of £1m.
i) What is the 95% VaR
ii) What is the 95% Expected Shortfall.
 iii) Assuming an investor invest in two of these projects (which have
independent payoffs) what is the 95% VaR of the portfolio
iv) What is the 95% expected shortfall of the portfolio.

Confidence VAR
95% 1.645
99% 2.326

Some question based on Jorion – Value at Risk (2006)