Consider a $10 million portfolio of stocks. You perform a Monte Carlo simulation

Question

Consider a $10 million portfolio of stocks. You perform a Monte Carlo simulation to estimate the VaR for this portfolio. You choose to perform this simulation using a normal distribution of returns for the portfolio, with an expected annual return of 14.8 percent and a standard deviation of 20.5 percent. You generate 700 random outcomes of annual return for this portfolio, of which the worst 40 outcomes are given below 0.400 0.320 0.295 -0.247 0.398 0.3160.282-0.233 0.397 0.3140.277 -0.229 0.390 0.3100.273-0.226 0.355 0.303-0.273-0.225 0.350 0.3010.261-0.223 0.349 0.3010.259-0.218 0.347 0.300-0.253-0.216 0.343 0.298-0.251-0.215 0.333 0.2960.248-0.211 TASK. Using the above information, compute the following A. 5 percent annual VaR. R 1 nercent annual VaR

Explanation / Answer

Outcomes Net earnings -0.4 -4 Percentile 95% -0.398 -3.98 5% annual VAR -2.1595 -0.397 -3.97 -0.39 -3.9 Percentile 99% -0.355 -3.55 1% annual VAR -2.1256 -0.35 -3.5 -0.349 -3.49 VAR is calculated using percentile function amongst the worst outcomes -0.347 -3.47 95% for 5% annual var and 99% for 1% annual Var -0.343 -3.43 -0.333 -3.33 -0.32 -3.2 -0.316 -3.16 -0.314 -3.14 -0.31 -3.1 -0.303 -3.03 -0.301 -3.01 -0.301 -3.01 -0.3 -3 -0.298 -2.98 -0.296 -2.96 -0.295 -2.95 -0.282 -2.82 -0.277 -2.77 -0.273 -2.73 -0.273 -2.73 -0.261 -2.61 -0.259 -2.59 -0.253 -2.53 -0.251 -2.51 -0.248 -2.48 -0.247 -2.47 -0.233 -2.33 -0.229 -2.29 -0.226 -2.26 -0.225 -2.25 -0.223 -2.23 -0.218 -2.18 -0.216 -2.16 -0.215 -2.15 -0.211 -2.11

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