A PRESENTATION

ON

VALUE AT RISK (VaR)

STUDIES OF INDUSTRIAL
SECURITIES PORTFOLIO
A METHODOLOGY FOR OPTIMIZING PORTFOLIO
RISK USING CRYSTAL BALL

PRESENTED BY
NAMAN SWAROOP
057515
Mob:9358423378

Value at Risk
 INTRODUCTION

For Investors, risk is about

the odds of losing money.

What is my worst case

scenario?
How much could I lose in a
really bad month?
Value at Risk
 INTRODUCTION
“VAR summarizes the worst case loss over a
target horizon with a given level of
confidence.”
- Philippe
Jorion

“Value at risk measures the worst case

expected loss that an institution can suffer
over a given time interval under normal
market conditions at a given confidence level.
It assesses this risk by using statistical and
simulation models designed to capture the
volatility of assets in a portfolio.”
-Cormac
Butler Value at Risk
 INTRODUCTION
A portfolio is a bundle or combination
of individual assets or securities.

VaR of a portfolio is simply

σXz
σ:standard deviation of portfolio
z: z score value at a given
confidence. eg:2.33 @ 99%

Value at Risk
VaR CALCULATION METHODS
Three methods:

3. HISTORICAL METHOD
4. VARIANCE-COVARIANCE
METHOD
5. MONTE-CARLO SIMULATION

Value at Risk
MONTE CARLO
METHOD(MCS)
Historical/Implied
Data

Model
STOCHASTIC
parameters MODEL

FUTURE PRICES

Securities Full
Portfolio
Model Valuation Positions

Distribution
Of values

Value at Risk
CRYSTAL BALL (CB)& MCS
CB WORKING MODEL

Value at Risk
PROBLEM IDENTIFICATION

How investors can lower the risk

in their equity investment
portfolio by sensible
diversification ?

Value at Risk
 OBJECTIVES
• To calculate the Value at Risk of the
industrial securities portfolio, so
that, the investor can invest in
modified Sensex portfolio by
choosing similar alternative
securities within ‘A’ group securities
in terms of volatility with his own
level of risk taking ability.
• To understand the awareness of
institutional investor and the
technique used by those to manage
risk adjusted return.
Value at Risk
 NEED OF THE STUDY
An investor invests on the basis of
his risk taking ability. This study
is to develop a methodology to
measure or to calculate the
possible loss in worst case. If the
investor is ready to take that
much of the risk, then only he will
invest in that portfolio.

Value at Risk
RESEARCH METHODOLOGY
• NATURE OF THE STUDY: Analytical Study
• SAMPLING TECHNIQUE: Judgmental Sampling (Sensex)

• SAMPLE
• Primary Data: A web based questionnaire was
developed for professionals working in the field of
Risk Management.
• Sample Size : 3

• Secondary Data: The secondary data (share prices) is

collected from www.bseindia.com

• SOFTWARE USED FOR STATISTICAL CALCULATION

MS Excel 2003
Crystal Ball 5.1 Student Edition

Value at Risk
 ANALYSIS
ASSUMPTIONS
– Dividend is not taken into
consideration.
– The Scrip’s rate of return follows a
normal distribution.
– The holding period for VaR
calculation is one day.

Value at Risk
 ANALYSIS
• STEP ONE
– Data Adjustment
BAJAJAUTO(dummy data) BAJAJAUTO

3500 3500

3000 3000

2500 2500
ADJUSTMENT
2000
price

2000

Price
1500 1500

1000 1000

500 500
0 0
1 176 351 526 701 876 1051 1226 1401 1576 1751 1 176 351 526 701 876 1051 1226 1401 1576 1751
Obs e rvations Observations

– Capital Gain
(P1-P0) / P0
– Average Rate of Return
– Standard Deviation (Volatility)
– Correlation Matrix

Value at Risk
 ANALYSIS
• STEP TWO
– Sorting
– Formation of Portfolio
Portfolio 1 Portfolio 2 Portfolio 3
Small Standard Deviation Medium Standard Deviation High Standard Deviation
GLAXO RANBAXY IPCL
BAJAJAUTO GRASIM INFOSYSTCH
ABB DRREDDY BPCL
HINDALC0 SUNPHARMA SatyamAdj
SBIN ONGC SAIL
RELIANCE ORIENTBANK WIPRO
HDFCBANK DABUR HCLTECH
ACC GAIL VSNL
CIPLA BHEL ZEETELE
SIEMENS MTNL ICICIBANK

Value at Risk
 ANALYSIS
• STEP 3
– Portfolio Values are inserted
– Crystal Ball is invoked
• STEP 4
– Assumptions, Decision Variables &
Forecast Cells are defined.
– MODELLING EQUATION
Return = expected return of portfolio 1*investment in portfolio 1 + expected return
of portfolio 2*investment in portfolio 2 + … + expected return of
Portfolio N*investment in portfolio

Value at Risk
 ANALYSIS
• STEP 5
– SIMULATION
– The Crystal Ball generates the
descriptive statistics.

Demonstration
Value at Risk
 FINDINGS
QUESTIONNAIRE

NAME DESIGNATION ORGANISATION

1 SWAMI DAYAL FINANCIAL ANALYST / DENA BANK
CREDIT OFFICER
2 NISARG A. DESAI MARKET RISK ICICI BANK LIMITED
ANALYST
3 SACHIN BANSAL MANAGER - RISK CREDIT SUISSE
ANALYTICS

Value at Risk
 FINDINGS
QUESTIONNAIRE: Financial Institutional Investors
• Measuring risk is one of the crucial
activities carried out by these financial
institutions.
• These institutions have group of experts for
the purpose of calculating VaR.
• As per the response from the designed
questionnaire we have seen the that , Value
at Risk is being used by the financial
institutions. It is very specialized field of
activity, utilized by experts.
• For the purpose of calculation of VaR, they
are using almost all possible method of
calculations.
Value at Risk
 FINDINGS
• PORTFOLIO ANALYSIS
VaR is calculated at
99% confidence
95% confidence

Value at Risk
 FINDINGS:VaR @ 99 %
PORTFOLIO 1

VALUE
@
RISK

Value at Risk
 FINDINGS:VaR @ 99 %
PORTFOLIO 2

VALUE
@
RISK

Value at Risk
 FINDINGS:VaR @ 99 %
PORTFOLIO 3

VALUE
@
RISK

Value at Risk
FINDINGS:VaR @ 95 %

Value at Risk
 FINDINGS: MODIFIED
PORTFOLIO
We Repalced ICICI with PNB in
portfolio 3 and run the simulation.

VALUE
@
RISK

Value at Risk
 FINDINGS: TABLE OF
RESULTS
PORTFOLIO STANDARD MINIMUM MAXIMUM MEAN
DEVIATION (Rs) (Rs) (Rs)
PORTFOLIO 1 2,959.92 -9,032.22 10,638.20 204.54
PORTFOLIO 2 3,042.05 -8,474.52 10,712.97 221.81
PORTFOLIO 3 5,676.53 -17,278.36 20,330.57 393.11
PORTFOLIO 3* 4,867.49 -14,254.34 17,327.22 685.78

Modified Portfolio

Value at Risk
 RECOMMENDATIONS
While maintaining the return it is possible
to reduce the VaR in a portfolio by
substituting with a less volatile security
from a group instead of most volatile
sensex security.

Such improvement in the risk adjusted

return on capital (RAROC) can be achieved
in each of the 3 above mentioned portfolios.

It is for each institutional investor to

restructure his equities portfolio in
accordance with his objectives using the
tools and techniques that have been
demonstrated in this project work.
Value at Risk
 CONCLUSION
The methodology used to optimize the
portfolio risk by measuring value at
risk of the portfolio is very useful in
real life situation also, as it is based on
Monte Carlo Simulation. An investor
can easily identify his preferred
portfolio by knowing the worst case
loss. The calculations are based on real
life data; hence it presents a true
picture of calculations and behavior of
portfolio value.
Value at Risk
 LIMITATIONS
Crystal Ball

Time and hardware restrictions

made it extremely difficult to
examine a large number of equity
substitutions for observing there
effect on risk and return .

Value at Risk
 LIMITATIONS
Questionnaire

Number of responses to the

questionnaire was very small owing to
the necessity of inviting responses
from experts in this area of
specialization. Moreover this time of
the year the expert are tied-up with
preparation of annual accounts for the
year ended 31st march and so getting
responses from them was extremely
difficult.

Value at Risk
Value at Risk