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A Course in Risk Management Instructor: Lou Gattis Topic #2: Measuring Portfolio Risk and Return 1 Learning Objectives Measure the risks of a stock investment Measure the risks of a portfolio of stocks, bills, and bonds 2 Risk Measurement - Measures What is the risk of a $100,000 investment in domestic stocks? Stress Tests Hypothetical Stress Test E.g. +/- 10%, E.g. Market Crash: -30% Historical Stress Test E.g. Great Depression, Housing Crash, Black Monday (10/19/87) Value-at-Risk (VaR) Historical Simulated VaR E.g. 1-year, 90%, 95%, 99%, Variance-Covariance VaR (Assumes Normal Distribution) E.g. 1-year Horizon, 90% Confidence Interval E.g. 1-day Horizon, 95% Confidence Interval E.g. 5-day Horizon, 95% Confidence Interval 3 Hypothetical Stress Tests $100,000 investment in domestic stocks A hypothetical stress test specifies a specific loss and/or market environment +/- 10%: $10,000 30% Market Crash: $30,000 Pros Transparent, Simple Cons No horizon specified Do not know likelihood of loss Does not use historical record 4 Historical Stock Returns Annual Asset Returns1928-2011: DamodaranOnline Year Stocks 1928 43.81% 1929 -8.30% 1930 -25.12% 1931 -43.84% 1932 -8.64% 1933 49.98% Histogram Returns Frequency -50% 0 -40% 1 -30% 2 -20% 3 -10% 5 Histogram 18 16 14 12 10 1934 -1.19% 0% 13 8 1935 46.74% 10% 14 6 Frequency 1936 31.94% 20% 16 4 1937 -35.34% 30% 14 2 1938 29.28% 40% 11 0 1939 -1.10% 50% 4 1940 -10.67% 60% 1 Returns 1941 -12.77% More 0 1942 19.17% Totals 84 5 ... - tailieumienphi.vn
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