+/-15% word count
The pdfs are samples of the assignments
BAFI1029 Derivatives and Risk Management
Assessment 3 – Individual Risk Management Report (50%)
Report and Excel
Due Date: Week 13 23:59 Sunday, 17th April 2022
? Assessment Task
This is an individual task. In this assessment, students are required to form one equity portfolio, evaluate their risks and provide solution to manage the risk. The goal of this individual assignment is to gain a better understanding of the portfolio investment (in the US stock market) and risk management process. Below are the tasks:
? to build one equity investment portfolio and justify the stock selection
? to hold the portfolio from Monday, 14th March 2022 to Thursday, 31st March 2022 and observe its changes
? to identify the portfolio risk by reporting portfolio’s VaR
? to provide suggestions of managing the risk
? to communicate your investment and risk management process using a professional report
? Portfolio Creation
Please follow the following steps to build a portfolio.
1. Create an account (with your real first & surname) on www.marketwatch.com
2. Create a watchlist of one Portfolio on Monday, 14th March 2022
Note: The specified date here is used to start the observing period of your portfolios, not the date on which you must perform the task. For example, you can create portfolios either on Monday, 14th March 2022, or on dates such as 16th March 2022 or 15th April 2022, but you will still observe the price change between the sample period Monday, 14th March 2022 - Thursday, 31st March 2022. As an illustration, this is the link to the historical daily prices of the AMZN stock.
Download AMZN Data | Amazon.com Inc. Price Data | MarketWatch
3. This watchlist of Portfolio ($1 million) consists of Four stocks from the S&P 500
a. Choose any Three stocks from Table 1 (that are the largest in S&P500 index) plus Tesla (TSLA)
b. Make the number of shares for TSLA equal to “Last three digits of your student number” if they are larger than 99.
c. Make the number of shares for TSLA equal to “First three digits of your student number” if your last two digits are smaller than or equal to 99.
d. Example: For student S7777777, you need to hold 777 shares of TSLA in your Portfolio For student S6660011, you need to hold 666 shares of TSLA in your Portfolio.
e. Determine the weights and shares for the rest of the stocks you chose in step a.
f. You have USD 1 million for this Portfolio.
Note: Since the shares can’t be bought in fraction, a tiny variation from the specified budget is acceptable. You can choose to hold some Cash if you believe the investment opportunity is not good enough, but you will need to justify this decision in your report. The total $1 million investment you have is based on the share prices on Monday, 14th March 2022.
4. Take screenshots of your portfolio and the necessary information in all sections. Make sure you attach them in the Appendix of your submitted report.
5. Suppose this is a Buy-and-Hold strategy, therefore, do not change your portfolio setting during your holding period Monday, 14th March 2022 - Thursday, 31st March 2022.
? Guideline for Investing and Calculations
Marking Guide Your report must include the following sections:
1. Trading philosophy: (2 marks)
Give an overview of your philosophy to form the portfolio. You should identify yourself as a value or growth investor or a mixture of both. Provide brief definitions for value/growth investing.
2. Portfolio construction: (5 marks)
Present your initial portfolio, including information on why you have invested in the stocks in your initial portfolio (three stock selection for Portfolio).
a. The overall market and macroeconomic condition (2.5 marks)
b. Industry consideration and/or diversification, specific stock’s strengths/positive prospects (2.5 marks)
3. Risk identification: (27 marks)
In this part, you should discuss the risk profile of your portfolio. Use daily historical stock price between 1st October 2017 and Friday, 11st March 2022 to calculate the VaR of your Portfolio. The discussion should include the following points:
a. Calculation and discussion of the one-day 95%-Value at Risk of each stock in your portfolio using historical simulation approach. That means, if you have four stocks in total, you need VaR for each. (10 marks)
b. Calculation and discussion of the five-day 99%-Value at Risk of your portfolio using model- building approach. Show key steps of workings. (3 marks)
c. Calculation and discussion of the five-day 99%-Value at Risk of your portfolio using a historical simulation approach. (3 marks)
d. Discuss the performance of VaR in (b) and (c), by comparing your calculated VaR results and the portfolios’ actual five-day returns (Monday, 14th March 2022 to Friday, 18th March 2022). (5 marks)
e. Calculation and discussion of the 95%-Expected Shortfall (CVaR) of your portfolio using a historical simulation approach. (6 marks)
4. Hedging using Options: (12 marks)
a. On any day between Monday, 14th March 2022 and the assessment due date, how will you use the option contract to hedge one of your three selected stocks in your Portfolio . You need to determine and explain which option you want to use (i.e., specify whether it is a call or put, when the expiration date is, appropriate strike price, whether you should go long or short, number of contracts, etc.). Provide justification for your decision. (7 marks)
Note: If you are not able to backdate historical price for the option, feel free to use the available price whenever you start drafting the answer to this question. For example, if your start to look at this question on 14th April 2022, and cannot find the historical option price on Thursday, 31st March 2022, then it is fine to use the option price on 14th April 2022.
b. Discuss when you will exercise your option and its potential payoff. (5 marks)
5. The professionalism of the report. (e.g., Usage of professional Figures and Tables, with numbering and captions.) (4 marks)
All submissions must be made electronically on Canvas, accompanied by a cover sheet. The submission must be using 1 or 1.5 spacing and 12-point Times New Roman font. Work that fails to meet these specifications will not be accepted. Students should ensure that the report is free from problems like copying and plagiarism.
The report and excel spreadsheet will be submitted through “Canvas-Assignments-Assessment 3”. You can submit multiple times before the due date. The report should be no longer than 2500 words (-/+ 15%), excluding references and appendix. The student can have up to 2-page appendix. Citation and reference should be provided where necessary. The Excel file contains your workings to support the reported analysis.
Students are required to keep back-ups of all submitted work just in case any are lost.
The tutor of your enrolled session will mark your assessment.
? The report will include VaR calculations which will require you to use Excel. Therefore, though the result of calculations should be discussed in the report, you should submit a separate Excel file to Canvas to show your detailed calculations. Meanwhile, you also need to include one or two tables to summarize the key results of your calculations.
? This instruction includes suggestions on items to include in the report, more information for parts you think are important may be included as you feel necessary, keeping in mind the word limit.
? The teaching team is not supposed to comment on your calculation workings or identify your calculation mistakes. The teaching team will provide guidance to make sure that you are on the right track. However, it is still your responsibility to investigate your work and identify the errors.
Table 1 Stock list
Company short name Code
1 Microsoft MSFT
2 Apple AAPL
3 Amazon AMZN
4 Alphabet Class A GOOGL
5 Meta, formerly Facebook FB
6 NVIDIA Corporation NVDA
7 Berkshire Hathaway Class B BRK.B
8 JPMorgan Chase JPM
9 Home Depot HD
10 Johnson & Johnson JNJ
11 UnitedHealth UNH
12 Procter & Gamble PG
13 Bank of America BAC
14 Visa Class A V
15 Adobe ADBE
16 Netflix NFLX
17 Salesforce CRM
18 Pfizer PFE
19 Walt Disney DIS
20 Mastercard Class MA
21 Exxon Mobil XOM
22 Thermo Fisher Scientific Inc TMO
23 Costco Wholesale Corp COST
? Additional Resources:
To help you construct your portfolio:
1. Information on value investing can be found here: https://www.investopedia.com/university/stockpicking/stockpicking3.asp
2. Information on growth investing can be found here: https://www.investopedia.com/university/stockpicking/stockpicking4.asp
1. Options contract for, for example, Facebook can be found here. https://www.marketwatch.com/investing/stock/fb/options
1. Historical stock prices can be downloaded from open access websites like yahoo finance such as the following link:
https://finance.yahoo.com/quote/FB/history?p=FB&.tsrc=fin-tre-srch for Facebook historical prices.
2. Annual return of the S&P500 can be found here https://ycharts.com/indicators/sandp_500_total_return_annual
3. A proxy for risk-free rate such as 3-month treasury bill can be found here https://fred.stlouisfed.org/series/TB3MS
Marking Rubric (50 marks)
Fail Pass Credit Distinction High Distinction
Trading philosophy (2 marks) Discussion is provided and demonstrate a mastery of the relevant knowledge Discussion is provided and demonstrate a good understanding of the relevant knowledge Discussion is provided, and a reasonable understanding of the relevant knowledge is shown Discussion is provided and demonstrate a good understanding of the relevant knowledge Discussion is provided and demonstrate a mastery of the relevant knowledge
Portfolio construction (5 marks) Explanation and reasoning are wholly lacking Some explanation and reasoning are evident, though not always complete and/or logical in places. Key points may be significantly lacking in support. Explanation and reasoning are generally well-formed and logical. Most of the main points are backed-up, though not always with sufficient supporting evidence and examples. All explanation and reasoning are fully formed and wholly logical. Most of the main points are backed-up with sufficient supporting evidence and examples All explanation and reasoning are fully formed and wholly logical. All of the main points are backed-up with sufficient supporting evidence and examples
Risk identification (27 marks)
Calculations are mostly inaccurate or incomplete. Workings are not shown. Difficult to follow the calculations or presentation or flow of information. Insufficient or no discussion is provided Calculations are mostly inaccurate. All workings are shown. Difficult to follow the calculations or presentation or flow of information. Discussion is provided but show poor understanding of the relevant knowledge
Calculations have some errors. All workings are shown. Difficult to follow the calculations. Discussion is provided, and a reasonable understanding of the relevant knowledge is shown Calculations have minor inaccuracies. All workings are shown. Presented in an easy-to-follow layout. Discussion is provided and demonstrate a good understanding of the relevant knowledge Calculations are mostly accurate. All workings are shown. Presented in an easy-to-follow layout. Discussion is provided and demonstrate a mastery of the relevant knowledge
Hedging using Options (12 marks)
Justification of option usage is not illustrated. Workings are not shown. Difficult to follow the presentation or flow of information. Insufficient or no discussion is provided Justification of option usage is partially illustrated. All workings are shown. Difficult to follow the presentation or flow of information. Discussion is provided but show poor understanding of the relevant knowledge Justification of option usage is well illustrated. All workings are shown. Difficult to follow the calculations. Discussion is provided, and a reasonable understanding of the relevant knowledge is shown Justification of option usage well illustrated. All workings are shown. Presented in an easy to follow layout. Discussion is provided and demonstrate a good understanding of the relevant knowledge Justification of option usage well illustrated. All workings are shown. Presented in an easy to follow layout. Discussion is provided and demonstrate a mastery of the relevant knowledge
The professionalism and writing quality of the report (4 marks) Writing and presentation lacks professionalism or does not use an appropriate business style. Many errors in spelling and grammar Poor communication, spelling and grammar characterize the work Writing and presentation is precise and business like. Some grammatical or spelling errors Writing and presentation is business like and precise. Few grammatical or spelling errors Writing and presentation is business like, precise and elegant. Consistently use correct grammar with rare spelling errors