Write a report on identifying and managing portfolio risk on real companies of your own selection.
Individual Risk Management Report
INSTRUCTIONS
Submit a word or pdf file with both your name and student on the first page and then submit a supporting
Excel file containing your workings for all of the reported analysis.
Assessment (individual): 50% towards your total mark. Word limit 2000 words. Every 100 words over the limit
will be penalized with -1 mark. The figures, references and appendix are not included when counting the
number of words.
Account and Portfolio Creation (Please strictly follow the instruction below, or you
may result in zero mark for this assessment)
1. Create an account (with your real first & surname) on www.marketwatch.com
2. Create two watchlists of Portfolios A and B on Thursday, 13th May 2021
3. Create a watchlist of Portfolio A ($400,000) consisting of TWO stocks.
a. Choose One stock from the S&P500 index plus Amazon.com (AMZN) stock.
b. Make the number of shares for AMZN equal to “Last two digits of your student number” if
these two digits are larger than 19.
c. Make the number of shares for AMZN equal to “First two digits of your student number” if
your last two digits are smaller than or equal to 19.
d. Example: For student S7777777, you need to hold 77 shares of AMZN in your Portfolio A
For student S6660011, you need to hold 66 shares of AMZN in your Portfolio A
e. Determine the weight and number of shares for the other stock you chose in step a.
f. You have USD 400,000 for Portfolio A.
4. Create a watchlist of Portfolio B ($1 million) consisting of Four stocks from the S&P 500
a. Choose any Three stocks from the S&P500 index plus Tesla (TSLA)1
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 B
For student S6660011, you need to hold 666 shares of TSLA in your Portfolio B
e. Determine the weights and shares for the rest of the stocks you chose in step a.
f. You have USD 1 million for Portfolio B.
5. Take screenshots of your portfolios and the necessary information in all sections. Make sure you attach
them in the Appendix.
The three stocks in portfolio B need to be different from the stocks in portfolio A. Also, make sure at least one stock has
sufficient information of option quotation.
Assignment Overview:
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 be completed in this assessment:
Your goal is
o to set up and manage two stock investment portfolios A and B,
o to hold these portfolios from Thursday, 13th May 2021 until – Friday, 28th May 2021.
o to identify and manage the portfolio risk, and
o to communicate your investment and risk management process in using a professional report.
Guideline for Investing and Calculations
Portfolio Investment Strategy
Since the trading game is only for the short term, the investment strategy is to generate high short-term growth
in the value of the portfolios over the holding period.
Marking Guide
Your report must include the following sections:
1. Trading philosophy: (5 marks)
Give an overview of your trading philosophy. You should identify yourself as a value or growth
investor or a mixture of both.
2. Portfolio construction: (10 marks)
Present your initial portfolio, including information on why you have invested in the stocks in
your initial portfolio.
a. News and the overall market and macroeconomic condition (3 marks)
b. The initial weightings of the portfolio and the rationale for that composition (7 marks)
3. Risk identification: (25 marks)
In this part, you should discuss the risk profile of your portfolios. On Friday, 21st May 2021, use
daily stock prices since 1st June 2017 to calculate the VaR. The discussion should include the
following points:
a. Calculation and discussion of the five-day 99%-Value at Risk of your portfolio A using modelbuilding approach. (7 marks)
b. Calculation and discussion of the five-day 99%-Value at Risk of your portfolio B using a historical
simulation approach. (10 marks)
c. Discuss the performance of VaR based on your calculation approaches in (a) and (b), VaR results
and actual five-day returns (Monday, 24th May 2021 – Friday, 28th May 2021). (8 marks)
4. Hedging using Futures: (25 marks)
a. On Tuesday, 18th May 2021, how will you use the E-Mini S&P 500 Future contract to hedge
your Portfolio B position against a possible market decline? Provide calculation as necessary.
(16 marks)
b. Provide a review of your hedging strategy based on the comparison between the portfolio
performance with hedging and the portfolio performance without hedging for the holding
period between Tuesday, 18th May and Friday, 28th May 2021. (9 marks)
5. Hedging using Options: (25 marks)
a. On Wednesday, 26th May, 2021, how will you use the option contract to hedge one of your
three stocks in Portfolio B2? You need to determine which option you need to use (i.e., the type
of option, appropriate strike price etc.). Provide justification for your decision. (8 marks)
b. Calculate the European option price using the option specification you chose in the previous
section (i.e., strike price, expiration date, etc.). (11 marks)
c. Provide a review of these option prices based on the comparison between the European option
price from your calculation and the actual option price you observed in the market. (6 marks)
6. The professionalism of the report. (e.g., Usage of professional Figures and Tables.) (10 marks)
Total=100 marks
Note:
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.
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.
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
Futures and Options Data
1. Futures contract on the S&P500 can be found here
https://www.marketwatch.com/investing/future/sp%20500%20futures
2. Options contract for, for example, Facebook can be found here.
https://www.marketwatch.com/investing/stock/fb/options
Other data:
2
You can choose any stock from the three stocks you selected for Portfolio B.
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.
You find a proxy for risk-free rate here 3-month treasury bill https://fred.stlouisfed.org/series/TB3MS
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
CAPM and Beta helpful videos:
1. Capital Asset Pricing Model (CAPM) https://www.lynda.com/Finance-Accounting-tutorials/Capitalasset-pricing-model-CAPM/565365/710964-4.html
2. What is Beta https://www.lynda.com/Finance-Accounting-tutorials/What-beta/565365/710968-4.html
