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

Simulated values -0.40 Percentile 95% -0.40 5% annual var -2.1505 -0.40 -0.39 Percentile 99% -0.36 1% annual var -2.1256 -0.35 -0.35 -0.35 -0.34 -0.33 -0.32 -0.32 -0.31 -0.31 -0.30 -0.30 -0.30 -0.30 -0.30 -0.30 -0.30 -0.28 -0.28 -0.27 -0.27 -0.26 -0.26 -0.25 -0.25 -0.25 -0.25 -0.23 -0.23 -0.23 -0.23 -0.22 -0.22 -0.22 -0.22 -0.21

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