Outline March 27

1
Outline March 27

• Current Events
• Class notes, last Thursday
• Matrix algebra
• Market Risk
• Problems
• Data
• Risk Grades
• Portfolio Science
• Risk Metrics

2
Data

• 7 year-zero coupon bond (face value)
• Yield 6.128
• 1,641,483
• Spot position in currency
• 1.7581 DM/US
• 1,600,000 DM
• Stocks in an index fund (Beta 1.0, all
  non-market risk diversified away))
• Correlations
• Bond,FX 0.008688
• Bond,Stocks 0.4109887
• Stocks,FX -0.39754
• Volatilities
• Bond 0.0309
• FX 0.0566
• Stocks 0.0726
• First step PV US currency of each
• Second step Calculate the VaR of each
• Third step Calculate the VaR for portfolio

Diversification Benefit?
3
Now stock w/beta ? 1

• Assume only systemic risk
• Multiply the volatility by beta
• Redo the previous problem with a beta of 0.80.

4
Risk Metric Data Fileshttp//www.riskmetrics.com/
products/data/datasets/index.cgi?hrefriskmetrics.
html

• Why Risk Metrics?
• Two types of files
• Volatility
• Correlation

5
Volatility File, 5 Fields

• SERIES,LEVEL(PRICE/YIELD),DECAYFCTR,PRICEVOL,YIELD
  VOL
• SERIES a code indicating the asset
• The first part of the code indicates the country
  (or currency)
• DEM Germany (deutsche marks) USD USA (dollars)
  etc.
• The next part of the code indicates the kind of
  asset
• .Z02. 2-year deep discount
  government bond
• .XS. Foreign exchange (spot market)
• .SE. Index of stocks etc.
• The final part of the code is VOLM for monthly
  volatility or VOLD for daily volatility.
• PRICE/YIELD
• for most assets, this column states the price (if
  available). For some debt instruments, it states
  the yield.
• DECAYFCTR
• this column can be ignored (it indicates the
  weight placed on recent versus earlier
  information in calculating the volatilities and
  is usually a constant throughout the data)
• PRICEVOL,YIELDVOL
• the last two columns are volatilities stated as
  percentages the relevant one for us is the
  price volatility.  

6
Correlation File

• Item is simply the correlation between two assets

7
Problem Handout
8
Risk Measures

• Portfolio Science
• Daily
• Weekly
• Monthly
• Annual
• Different from Beta?

9
Risk Grades

• Riskgrade
• Risk Impact
• XLoss
• Charts
• Risk Chart
• Price Chart
• Risk/Price Chart
• Streak Chart
• Risk vs. Return

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Live Demo Handouts