1. Explain Phase analysis using all the 3 factors PE PBV and Past Returns ie 2000,2008.

2020
Crash Events.
From the charts we can see that how market was just before the crash, the Nifty was in Phase 3.
After the Crash the PE dropped down and the Nifty is now in Phase 1.
After the crash when the Nifty showed negative returns we could know that market is in Phase 1 and
most likely to recover fast.
From here we found that amount of time spent in phase 1 and 3 is very less.

2. Explain how we can use a multiplier to find VAR for Mid & Small Cap using Nifty VAR
Explain Flexi Cap Allocation in different phases of markets (Phase i, ii, iii).

-- a) The Nifty VAR represents the VAR for Large cap index.

b) To find the VAR for Midcap and Small Cap Index we find the Beta of the index with respect to
Nifty.
c) Then multiply the Beta with Nifty index VAR to find the VAR of the Mid cap and small cap index.

Flexicap allocation is shifting between the small-cap , mid-cap and large-cap based on the
phase of the Market.

A) Phase 1- Since the Market has crashed and is at the bottom high weightage allocation is to be done
in Midcap and lesser weights in Large and small-cap stocks.
B) Phase 2- The markets are in an up trend hence higher weights are to be allocated in large cap and
mid-cap segments and lower in Small Cap.
C) Phase 3- Markets are about to crash hence the major allocation of weights to be done in large cap
and very less to none should be allocated to mid-cap and small-cap stocks.

3. How to calculate VAR and assign a probability to the outcome of VAR at Alpha of 10% and
1%

--VAR is Value at Risk. It is a loss and whenever a loss is quantified, the risk is assessed and assigned
with probability. There are two types of VAR. Normal and Worst or Abnormal VAR. Usage of VAR
depends on market conditions.

The VaR is based on models that assume normal market conditions and that a correlation can be
calculated for the covariance between financial instruments.

To reduce risk, banks diversify their financial assets so that there is less correlation in prices when
market conditions change, since a diversified portfolio is less risky than an undiversified one.

There are 3 widely used methods to calculate VAR: variance/covariance approach; Monte Carlo
simulation; and the historical approach.

We use Histogram too to find VAR, from there we found that it follows Normal Distribution. But it
only gives output straightforward. So, VAR assessment can be quantified using Phase +VAR.

If the market is in Phase 3, the Normal VAR is 46%

If the market is in Phase 1, the Worst-case VAR is 15%.

The probability of occurrence in phase 3 is very low.

The probability of occurrence in Phase 1 is very high.

VAR model involves 4 parameters to give NVAR and WVAR.

VAR= A*z*σ* √n.
A- Your investment

z-z table representation of the normal distribution

sigma- standard deviation of returns
here we consider daily returns
root n- VAR calculation for how many days.

There are different ways to calculate sigma.

1. Volatility Index (VIX)
2. ARMA (GARCH)- Auto regressive model
3. BS model

So we take past data and convert price to return to find risk.

Assign probability based on z value and by changing z value,we get NVAR and WVAR at
alpha = 10% and 1%.
Alpha Z value

10% -1.28

1% -2.33

4. Explain the relationship between Z, Alpha, (1-Alpha) with VAR

--

VAR= A*z*σ* √n.
From here we can see that VAR is dependent on the value of A, z, σ, and √n.

For every Alpha, we get the corresponding z value. Z table representation of normal distribution.

Alpha Z value

10% -1.28

5% -1.65

3% -1.88

1% -2.33
Alpha is the significance level used to compute the confidence level.

Alpha and Var are directly proportional to each other but Alpha and Z are inversely proportional.

So when alpha increases, (1-alpha) decreases.

When error reduces VAR increases and when confidence increases ,VAR also increases.

5. Explain Beta and How it can be used for equity allocation for high-risk portfolio and low-
risk portfolio.

--Beta is a measure of volatility of the stock against the overall market index.

For stock allocation,beta plays a major role.

Beta measures the relationship between the stock and the index.

Beta is used to create a high beta portfolio and a less beta portfolio.

Higher Beta or lower beta depends on the individual risk-taking profile.

Since risk and returns are based on allocation, it is called active allocation.

For High-Risk Portfolio, an individual who has a higher risk appetite will look for a higher
return so he will allocate in such a manner that the overall Beta of the portfolio is greater than 1.
The risk and return of the portfolio would be greater than the market.
For a low-Risk Portfolio, an individual who has a lower risk apetitite will look for lower return
so he will allocate in such a manner that the overall Beta of the portfolio is less than 1. The risk and
return of the portfolio would be lesser than the market.