Economics and Finance

Institute

RISK MANAGEMENT
Lec. LIM
Sophat

Return, Standard Deviation, Beta, & VaR

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Group Members
1. YANG Maria
2. SIM Kunthea
3. MAM Sokussa
4. SIV Chanreaksmey

5. VANNY Vansithsathya

Content
1. Background Information
2. Unsystematic Risk
3. Systematic Risk
4. Value at Risk

5. Excel Show

1. Background Information

Period of Study:

5 Jan, 09 - 4 May, 12

Data Type:

Daily data

Initial capital:

$100,000

Capital invested in:

AIG

$20,000

CAT

$15,000

DIS

$25,000

IBM

$18,000

MMM

$22,000

Holding period:

Confidential Level:

1 day

95%

2. Unsystematic Risk

Standard Deviation is used to calculate

unsystematic risk.

Steps in calculating SD:

Determine period of study

Determine type of data

Download historical data

Calculate return

2. Unsystematic Risk

Following those steps, we got result as below:

AIG
Mean
Standard Deviation

1.94%
50.70%

CAT
0.12%
2.52%

DIS
0.09%
1.95%

IBM
0.11%
1.41%

MMM
0.06%
1.63%

Analysis (e.g. AIG)

If we invest in AIG, wed receive an average return of 1.94%/day.

But, weve to face with unsystematic risk accounted for
50.70%/day as well.

Relationship between Mean & SD

Mean - SD = 1.94 50.70 = - 48.76%
Mean + SD = 1.94 + 50.70 = 52.64%
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3. Systematic Risk

We can call systematic risk as Beta

Capital Asset Pricing Model (CAPM) is used to

calculate .
= + & +

3. Systematic Risk

Steps in calculating

Determine period of study

Determine type of data

Download historical data

Calculate return, e.g. and &

Run regression between and &

3. Systematic Risk

Following those steps, we got result as below:

Coefficients
Alpha
Beta

0.018241591
2.085855351

Example: Calculate if & = %

= + &500 +

= 0.018241591 + 2.085855351 0.1

= 0.226827126

where = 0

4. Value at Risk (VaR)

VaR enables investors to calculate probability of

loss within a particular holding period under a

certain confidential level.

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4. Value at Risk (VaR)

Steps in calculating VaR:

Set amount of capital for portfolio investment

Select preferred corporations to invest
Download historical data
Return
Correlation => Covariance => Variance => SD
Variance-Covariance
Portfolio Variance
Portfolio Standard Deviation
NORMSINV(0.95)
VaR
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4. Value at Risk (VaR)

Following those steps, we got results as below:

Correlation
AIG
AIG
CAT
DIS
IBM
MMM

CAT

DIS

IBM

MMM

1
0.042855906
1
0.042206529 0.6624378
1
0.036016302 0.55926558 0.57922159
1
0.056636019 0.71718505 0.7073408 0.58855885

Covariance
AIG
AIG
CAT
DIS
IBM
MMM

0.256771106
0.000547667
0.000415969
0.000256308
0.000468809

CAT

DIS

IBM

MMM

0.00063601
0.00032493 0.00037828
0.00019808 0.00015821 0.00019723
0.00029546 0.00022473 0.00013502 0.00026685

Standard Deviation
AIG
0.506725869

CAT
0.0252193

DIS

IBM

MMM

0.0194495 0.01404398 0.01633543

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4. Value at Risk (VaR)

Covariance Matrix
Alpha's

20,000
AIG

AIG
CAT
DIS
IBM
MMM

0.256771106
0.000547667
0.000415969
0.000256308
0.000468809

Portfolio Variance

105664891.8

Portfolio SD

10279.34296

NORMSINV(0.95)

1.644853627

One-Day 95% VaR

16908.01456

15,000
CAT
0.00054767
0.00063601
0.00032493
0.00019808
0.00029546

25,000
DIS
0.00041597
0.00032493
0.00037828
0.00015821
0.00022473

18,000
IBM
0.00025631
0.00019808
0.00015821
0.00019723
0.00013502

22,000
MMM
0.00046881
0.00029546
0.00022473
0.00013502
0.00026685

Alpha's
20,000
15,000
25,000
18,000
22,000

=
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5. Excel Show

RM-assignment.xlsx

Thanks for Your Kind

Attention!

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