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N1569 Financial Risk Management: ESS A3

Your mark on this essay represents 70% of your final grade

Your essay should be between 2,700 and 3,300 words excluding equations, tables, legends to Figures and references. It should be submitted using Canvas/Turnitin and will be automatically checked for plagiarism for which severe penalties will be applied if found.

The Excel file contains three years of daily price data on two stocks, one in the Euro area and one in the UK and a broad market risk factor for each stock and the two forex risk factors appropriate to a US investor. Use these data to write an essay covering the following topics:

(1) Use (a) an equally weighted average of 50 returns and (b) and exponentially weighted

average with λ = 0.95 to calculate time series of equity betas for the two stocks;

(2) Use the current values for the equity betas to calculate four outputs, i.e. the overall

systematic Value-at-Risk (VaR) and Expected Shortfall for a portfolio that currently has equal US dollar amounts invested in each stock, using (a) historical simulation and (b) the normal linear VaR model, with inputs derived from the entire three year sample;

(3) Decompose the overall systematic VaR into equity VaR and forex VaR, and thendisaggregate the total equity VaR into systematic and specific components.

INSTRUCTIONS:

You can set the Value-at-Risk model parameter values to any (appropriate) level you wish. It is, however, important to state the all the models used in each part clearly, using properly defined mathematical notation.

The essay should start with a title page with a title and an abstract (100 words) and candidate number. The abstract should describe the main empirical results and state your conclusions. After that the essay should containseven numbered sections, with suitable titles of your choice. In the following, the word counts in brackets are guidelines only, there is no strict limit per section, only for the overall word count.

Here is a guide to what each section should contain:

1. An introduction which demonstrates an understanding of the questions asked and a description of the portfolio (300 words)

2. A description of the data, including suitable figures and tables (500 words)

3. An answer to (1) including a technical description of the models used, a presentation of the results obtained using suitable figures, and a discussion of these results (700 words)

4. An answer to (2) including a technical description of the models used, a presentation of the results obtained using suitable tables, and a discussion of these results (700 words)

5. An answer to (3) including a technical description of the models used, a presentation of the results obtained using suitable tables, and a discussion of these results (700 words)

6. Conclude with a short summary of the empirical results (100 words).

Marking Scheme

	Fail	Pass	Satisfactory	Good	Distinction	High Distinction
%	1-39	40-49	50-59	60-69	70-79	80-100
Quality of Text [20 marks]	Inadequate, insufficient, or incomplete. Difficult to read.	Unclear logical structure, poor use of English and many typos.	Satisfactory use of English and grammatical style. Logical flow difficult to follow.	Good grammar and use of English. Reasonable logical flow.	Clear structure, good grammar, and good logical flow.	Excellent presentation, clear logical structure with exemplary use of language.
Tables and Figures [20 marks]	Little or no attempt to display information well.	Incomplete and/or inadequate tables and figures.	Most of the analysis is presented using tables and figures, but the quality of these is only just satisfactory.	All the main parts of the analysis are presented using tables and figures, but little attempt to refine these with individual input.	Complete supporting information for the data analysis but display in tables and figures lacks polish	Representation of the data analysis beautifully presented with proper numbering, titles and captions to all figures and tables.
Data Analysis [30 marks]	Very little understanding of the topic, no real attempt at individual data analysis, just copying material that is available on Canvas or the web.	Shows poor awareness of the subject and little evidence of student’s own original data analysis.	Shows a reasonable understanding of the questions, original input to answers (rather than using course material without much change) but most answers are incomplete or inadequate.	Data analysis is focussed with good use of materials but lacks an in-depth understanding, with some answers being incomplete or incorrect.	Evidence of good underlying research and all questions answered adequately.	Shows a rigorous and a sophisticated understanding of the data analysis required to address all the questions asked. The answers are not only correct but analysed in a clear, concise and logical manner.

Content

[30 marks]

Demonstrates little

understanding of the topic and its context. No evidence of

critical

discussion and analytical

abilities.

Shows some

awareness and

understanding

but reads as

though much was simply copied

from the Canvas site or web. No real thought

about the suggested content.

Shows a reasonable understanding of the major points but

sometimes contains

irrelevant

information and/or is difficult to follow.

Too much reliance on Canvas or

external resources.

Develops a focussed and clear analysis. Some evidence of

original input

assimilating the

information obtained into a coherent

whole.

Develops a

sophisticated

argument. Shows a detailed

understanding of the major facts. Clear evidence of original thinking.

Shows a rigorous use of information learned

during the module and a sophisticated

understanding of risk models, balancing

appropriately between factual details and

theoretical issues.