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F&S Investments Understanding Value At Risk Case Solution
F & S investment portfolio is slightly distributed as a normal distribution. The normally distributed data is graphed as a histogram and creates a bell-shaped curve. The returns have varied over the range of -0.005 to +0.005. Most of the time the returns remain around 0.001.
The emerging market is equally distributed along a normal distribution curve. The data is well spread between the range -0.020 and 0.015. The highest frequency of return occurs three times near 0.005, 0.025 and 0.001. Lastly, the distribution curve for the developed market is less varied and not very close to normal distribution. The return remained very compact and did not show huge fluctuation.
Following questions are answered in this case study solution
What do the changes in the prices for each of the portfolios presented in Exhibit 1 indicate about the relative attractiveness of each asset to F&S? How has the relative value of each asset changed over the past two years?
What do the returns from each of the assets presented in Exhibit 2 indicate about the nature of their returns and how they have changed over time?
What do the average, standard deviation and range for the daily returns in Exhibit 3 tells us about each of these assets? Which asset would you prefer to invest in? Would your decision change if you considered the beta and the Sharpe Ratio? Would your opinion change if you considered weekly rather than daily returns?
Referring to Exhibit 4, comment on how the returns for each of these assets compare to a normal distribution. What do these characteristics of the distributions imply for investors at F&S?
What do the Value at Risk measures listed in Exhibit 5 tell us about the relative risk of each of these portfolios at the five per cent level? How does this level or relative risk compare to that at the one per cent level?
How would the Value at Risk results influence your choice of assets to invest in? How would the value at Risk results influence your choice of asset to hold as collateral against a loan?
Because you are considering adding one of these portfolios to your existing portfolio, which would you recommend based on the information in Exhibits 1 through 5?
Exhibits 6 and 7 present results for synthetic portfolios that mimic what F&S’s new set of portfolios would look like. Given this information, which portfolio would you recommend that F&S consider adding? Would your recommendation change if your major concern was one of minimizing losses and therefore preserving the value of principle rather than the maximization of returns?
Case Analysis for F&S Investments Understanding Value At Risk
1. What do the changes in the prices for each of the portfolios presented in Exhibit 1 indicate about the relative attractiveness of each asset to F&S? How has the relative value of each asset changed over the past two years?
The process of three varies significantly from each other which shows the low correlation among them. Low correlation essentially means that the price of one portfolio changes independent of the other portfolio. The reason for low correlation could be that these portfolios are from different industries which is not linked to a huge extent. Starting with F&S portfolio which have shown stability between 2005 and 2007 as compared to other portfolios. The price of the portfolio started a little below 1200, and at the end of 2007, it has increased a little above 1200. This shows that even with the changing economic conditions the price of the portfolio has fluctuated very little.
Emerging market equities remain more volatile than F&S investment portfolio. This portfolio was successfully able to maintain the upward trend. In 2005, the price of the portfolio was around 400, and it started increasing. At the end of 2007, the price was near 700. Lastly, the developed market bonds have shown the highest level of fluctuation within three years. This shows the inherent risk in this portfolio that exist because of interest rate fluctuation.
2. What do the returns from each of the assets presented in Exhibit 2 indicate about the nature of their returns and how they have changed over time?
The returns of each portfolio indicate that how much the holder of a specific portfolio has been able to make more than of the being invested. Starting with F&S investment, the return has been changing significantly during the three years’ period. The return was positive in May 2005 and started decreasing in April 2005. This pattern was followed in during the three years. The highest negative returns were seen in June 2006 and July 2006. The highest positive returns were also seen in this period. This shows that these two were highly uncertain for this portfolio.
The emerging market portfolio has shown huge changes in the returns. The highest negative return was again seen in June 2006 for this portfolio. And the highest positive return was seen in August 2007. Lastly, developed market bonds are also following the same pattern as the other two portfolios. The highest negative return was seen in December 2005. The highest positive return was seen in June 2006.
3. What do the average, standard deviation and range for the daily returns in Exhibit 3 tells us about each of these assets? Which asset would you prefer to invest in? Would your decision change if you considered the beta and the Sharpe Ratio? Would your opinion change if you considered weekly rather than daily returns?
The average of the three portfolios shows the mean return over the three years. The average return of emerging market portfolio is greater than the other two portfolios. The standard deviation showed that how much the portfolio returns show variation from their mean. Again, the standard deviation of emerging market return is highest which shows more volatility. The range of return is the difference between the highest and the minimum return of each portfolio. The range of the emerging market portfolio is again highest. Decision-based on these three characteristics would recommend emerging market portfolio as it offers the highest return.
Beta is the measure of systematic risk of the portfolio which compares it with the market as a whole. The beta of emerging market portfolio is 1.09 which shows the highest systematic risk as compared to other portfolios. This is because in emerging markets the economies are more vulnerable to face negative impacts. The Sharp ratio is the measure of calculating risk adjusted return. The risk adjusted return is highest for F&S investment portfolio. The decision of choosing an investment portfolio will change if these two measures take into account. Beta would recommend the developed market return as it offers low systematic risk. The sharp would suggest F& S investment portfolio.
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