FINS5542 exercise 2

FINS5542 Assignment 2
Date Due: 11pm 12 July, with electronic submission via the course
website.
1. In this question we will conduct a backtesting exercise for the 1997
year. For each trading day in 1997 we must graph the 99% VaR that
was computed 10 trading days before and we must also graph the
realised loss in the portfolio that occurs over this same period.
One is required to produce two graphs. The first graph should be the
backtesting of the VaR method under normality. The second graph
should be the backtesting of the VaR method under historical sim-
ulation of daily changes in prices. Finally, one should interpret the
findings from both of these graphical displays, (noting presentation
quality is important).
For these exercises, assume that we hold a portfolio of 15 assets,
namely aan2, aan3, aan4, aan5 aan6, aan7, aan8, aan9, aan10, aan11,
aan14, aan15, aan17, aan18 and aan19 where $2,000,000 dollars was
the value of our holdings in each of the stocks ten trading days before
the first trading day in 1997. i.e. On 17 December 1996, the value of
our portfolio is $30,000,000. Also assume that the number of shares
we hold in each of these stocks does not change over the time frame
of our back-testing exercise. Finally, in computing the VaR estimates
one should use the last 800 changes in prices. The data is located on
the fins5542 Moodle page. See last page, for variable names.
In addition to printing out the Excel graphs, one should also print out
the Ox computer code.
[20 marks (for each method, 2 marks for coding, 4 marks for graph-
ing, 4 marks for write-up) ]
1
2. In this question we will conduct a backtesting exercise for a portfolio
of 6 stocks for the 2021 year. For each trading day in 2021 we must
graph the 99% VaR that was computed 10 trading days before and we
must also graph the realised loss in the portfolio that occurs over this
same period.
One is required to produce two graphs. The first graph should be the
backtesting of the VaR method under normality. The second graph
should be the backtesting of the VaR method under historical sim-
ulation of daily changes in prices. Finally, one should interpret the
findings from both of these graphical displays, (noting presentation
quality is important).
For these exercises, assume that $10,000,000 dollars was the value of
our holdings in each of the following 6 U.S. companies, Coca-Cola
Co., Home Depot Inc., Intel Corp., McDonald  s Corp., Walt Disney
Co. and Walmart Inc., (sourced from the CRSP database), ten trading
days before the first trading day in 2021. Also assume that the number
of shares we hold in each of these stocks does not change over the time
frame of our back-testing exercise. Finally, in computing the VaR
estimates one should use the last 900 changes in prices.
In addition to printing out the Excel graphs, one should also print out
the Ox computer code.
[30 marks (for each method, 3 marks for coding, 3 marks for data
description, 4 marks for graphing, 5 marks for write-up) ]
3. Discuss, in less than 1200 words, the limitations of VaR and Ex-
pected Shortfall, relating these to the results you obtained above in
questions 1 and 2.
Please include appropriate references, with a reference section. Both
content and writing quality are key criteria of equal importance.
[30 marks]
2
Variable Name
aan1 CISCO SYSTEMS INC
aan2 MICROSOFT CORP
aan3 INTEL CORP
aan4 TEXAS INSTRUMENTS INC
aan5 SPRINT CORP
aan6 AMGEN INC
aan7 INTERPUBLIC GROUP COS INC
aan8 MELLON BANK CORP
aan9 WARNER LAMBERT CO
aan10 BRISTOL MYERS SQUIBB CO
aan11 ENRON CORP
aan12 GENERAL ELECTRIC CO
aan13 TIME WARNER INC
aan14 EXXON CORP
aan15 DELL COMPUTER CORP
aan16 AMERICAN EXPRESS CO
aan17 SUN MICROSYSTEMS INC
aan18 CORNING INC
aan19 FORD MOTOR CO DEL