This is a Bloomberg-based exercise.

Suppose you hold a portfolio consisting of a $350,000 investment in company A stock and a $650,000 investment in company B stock. Companies A and B are ASX50 constituent companies (see https://www.asx50list.com/).

Rules for the choice of companies A and B. Company A is ranked as the 30th, and company B is ranked as 13th. The ranking is based on market cap, with 1 indicating the largest company at the ASX and 50 the fiftieth largest company.

Please provide a screenshot of the ranking list.

30th - Sonic Healthcare

13th - Fortescue

You can now start performing the following tasks:

1. Search for the stocks of these two companies. Download historical daily price data over the last 501 trading days (approx. 2 years). [1 mark]
2. Calculate with Excel the daily returns of the stocks of companies A and B. [1 mark]

Now you need to estimate VaR with the two approaches you learned in class.

Historical simulation:

3. Based on the 500 returns for each stock calculated in b., calculate 500 alternative scenarios for the $ value of the $350,000 investment in company A stock and the $650,000 investment in company B stock, respectively. Sum these two for each scenario to obtain 500 simulations for the $ value of your portfolio consisting of stock A and stock B. [2 marks]
4. Based on the 500 scenarios for the $ value of your portfolio consisting of stock A and stock B, calculate the 500 alternative gains/losses for your portfolio. [1 marks]
5. Calculate the 5-day 99% VaR for this portfolio. What does it mean? [2 marks]
6. Briefly discuss the advantages/disadvantages of this approach. [1 mark]

Model-building approach:

7. Calculate the standard deviations of the stocks returns over the last two years. [1 mark]
8. Calculate the coefficient of correlation between the stocks returns. [1 mark]
9. Compute the 5-day 99% VaR for this portfolio. What does it mean? [2 marks]
10. By how much does diversification reduce the VaR? Also provide a brief comment on the reduction. [2 marks]
11. Briefly discuss the advantages/disadvantages of this approach. [1 mark]

Finally,

12. Compare the results of both approaches. Provide possible explanations for the differences. [2 marks]

13. Briefly discuss the usefulness of VaR. [1 mark]