FIN41360 Portfolio and Risk Management

Assignment 2
(Please read all instructions and notes very carefully)

Risk Modelling

March 28, 2023

Required tasks:

1. Suppose you are the risk manager responsible for producing a risk measurement
report for the Board Risk Committee of a Global Investment Bank regarding three
separate $1 million investments in portfolios with exposure to (i) equity risk, (ii)
interest rate risk, and (iii) both equity and interest rate risks.

2. Collect historical covering at least five years ending on 27th March 2024 for:
(a) an equity portfolio comprised of one stock from each of the sectors that make
up the S&P 500 stock market index; https://www.spglobal.com/spdji/en/
index-family/equity/us-equity/sp-sectors/#overview.
(b) an interest rate portfolio, striving to consider a portfolio that represents as
realistically as possible a typical portfolio held by a financial institution.
The choice and/or construction of such portfolios should be carefully motivated,
drawing on ideas from the Portfolio Choice part of the module.

3. Your risk estimates are to be for a one-day time horizon as at the 28th of March
2024.

4. In order to complete your risk measurement report you should do the following:
(a) use different parametric and non-parametric approaches to estimate Value at
Risk (VaR) and Expected Shortfall (ES) for the three investments.
(b) complementary your risk assessment with alternative risk measures you deem
appropriate. The alternative risk measures should include, at least, one spec-
tral risk measure estimate for the investments which is not based on the normal
parametric VaR (be strategic with the number of slices being used when com-
pleting the integration approximation).
(c) using a rolling window approach with an estimation window of at least two
years, conduct a backtesting exercise of the different VaR and ES estimates
that you have calculated.
(d) compare and contrast the different estimates you have arrived at referring to
both the academic literature and the testing you have completed in order to
specify which estimate you are recommending for each of three investments.

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 (e) include sensitivity testing to support the risk measurement choices you have
made.
(f) taking into consideration of the recent market movements/events, document
any additional considerations as part of your analysis that you think would be
of relevance for the Board Risk Committee to be made aware of.

Provide a soft copy report containing your findings, which should be appropriately tab-
ulated so as to maximize their legibility, any required evaluation and discussion of your
findings and, when appropriate, a description of the methodology adopted. The soft re-
port should be submitted via the submission folder on Brightspace and a hard copy in a
dedicated mail box in the Smurfit School foyer by Friday, 3rd May 2024 at 5pm. The
submitted report should be attached to the appropriate submission form, which should
closely adhere to the template provided in Brightspace and clearly provide all informa-
tion required therein, including the assignment number, the team number, the name and
student number of each team member and details on their individual contribution.1
The maximum length of the report should be 3000 words, excluding tables, figures,
references, and any appendices. To stay within the word count, it will be important
to organize your report appropriately (e.g., making appropriate use of tables, avoiding
repetitions, etc.).
Students are required to use Excel/Matlab/Python or combinations of these software
packages to complete the assignment. Workings by way of Excel/Matlab/Python code
and data should be e-mailed to my e-mail address: [email protected]. Al-
though grades are solely based on your report, the workings are required to verify all
calculations. In the email title, you should indicate FIN41360: Assignment 2, followed
by the team number in bracket.2

Notes

ˆ Clarity is of paramount importance and lack thereof will be penalized heavily. Es-
sentially, as in real world endeavors, unclear answers and discussion will amount to
not having provided the required answer/discussion. Hence, try and privilege clarity
and quality over quantity. For example, if you are running out if time, it is better to
address well a few questions than to attempt to address them all in a poor and, hence,
necessarily obscure manner.

ˆ All the relevant information for the assignment is provided in this document and the
course outline. If an aspect of the analysis is not specified in either document, it means
1
Please note that this is a requirement and, if not fulfilled, I will not accept the submission, applying
any relevant late submission penalty until a proper submission is made.
2
Please note that this is a requirement and, if not fulfilled, I will not accept the submission, applying
any relevant late submission penalty until a proper submission is made.

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 that it is left for students to make a choice on it, in light of the theory covered in the
course.

ˆ Students are required to make and motivate any such choice relying on the insight
offered by the theory covered in the course and relevant references. The soundness
of such choices, evaluated in the light of available theory and empirical evidence, will
be assessed and contribute to the overall mark. The more advanced aspects of the
assignment also require a certain amount of autonomous research, which will play an
especially important role in the assignment of higher marks.

ˆ Submissions should contain, as appropriate, a literature review. The latter should

strive to offer a comprehensive and systematic, yet succinct, review and discussion of
academic and practitioners contributions to the body of knowledge on issues and topics
examined during the course that are relevant to address the issues at hand, with the
aim to expand and offer additional substantial insight compared to the insight and
level of knowledge developed by the course material (including lectures).

ˆ In this regard, keep in mind that the assignment is designed so that only a small fraction
of the teams will be able to address all questions well, because marking practice in
serious Universities (such as UCD, which has this enshrined in official marking rules)
dictate that the highest marks be awarded with parsimony.

ˆ Appropriate use of tables and figures, as in academic papers and rigorous industry re-
ports, is of crucial importance to attain the required clarity. They should be thought-
fully designed to maximize clarity and impact. For example, annotate your tables and
figures to help the reader gain an immediate understanding of the findings reported
therein. Also, try and condense your findings in as few tables and figures as possible,
to help the reader see the overall picture emerging from your study.

ˆ Teams are strongly encouraged to appoint an “editor” whose job should be to coordin-
ate the efforts of the team and make sure that the final report is coherent and well
organized.