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# http://www.bionicturtle.

Inputs/assumptions
Matrix math
Key portfolio calculations (marginal VaR, Inc'l VaR, Component VaR)

Portfolio inputs: A B
Position \$100.00 \$100.00
Volatility 10.00% 14.00%
Tot Portfolio \$200.00
Correlation 0.20

Var-Covar 0.01 0
Matrix: 0 0.02

Portfolio
Variance (matrix) \$352.00
Variance (alt) \$352.00
Volatility \$18.76
Volatility (alt.) \$18.76
VaR \$43.65

Individual Positions A B
Positions \$100.00 \$100.00
Volatility 10.00% 14.00%
(sigma)(X) 1.28 2.24
Individual VaR \$23.26 \$32.57
Beta 0.727 1.273
Marginal VaR 0.159 0.278
Marginal VaR 0.159 0.278

Incremental Position A B
+/- Position \$0.010 \$0.000
(x Marg'l VaR) 0.00159 0.0000
Incremetal VaR 0.00159 0.00000

## Component VaR \$15.87 \$27.77

Percent Contrib. 36% 64%
Question:
Assume a \$200 t
has volatility of 1
Confidence 99.00%
(i) What is portfo
Critical z 2.33 (ii) What is portfo
(iii) What are the
Matrix math: (iv) What is the i
(v) What are the
Positions (x') Var-Covar Matrix (sigma) Positions (x) (vi) If correlation
\$100.00 \$100.00 0.01 0 \$100.00
0 0.02 \$100.00
(i)
Kudos if you can
Positions (x') (sigma)(x) x'(sigma)x Variance = (\$100
\$100.00 \$100.00 1.28 \$352.00 Volatility = SQRT
Or, you can use
2.24
Volatility = SQRT
(9.38%)(\$200) =

## 1.28 1.28 (ii)

2.24 2.24 No difference!
With 99%, the no
Diversified VaR =
This is a relative

(iii)
(\$100)(10%)(2.3
(\$100)(14%)(2.3

(iv)
The incremental
Assuming the ma
approximate incr
between Portfolio

(v)
\$43.65
First, we want th
But, given that th
Marginal VaR = P
Asset #1 Margin
Asset #2 Margin
Component VaR
Asset #1 Compo
Asset #2 Compo
Percentage contr
Asset #1 Compo
Asset #2 Compo

(vi)
If correlation = 1
But for imperfect
Component VaR
Asset #1 Compo
Asset #2 Compo
Percentage contr
Asset #1 Compo
Asset #2 Compo

(vi)
If correlation = 1
But for imperfect
Sum of compone
Question:
Assume a \$200 two-asset portfolio with equal positions in both assets (\$100 + \$100). Asset #1 has vo
has volatility of 14%. Their correlation is 20%. Our desired confidence is 99%.
(i) What is portfolio volatility?
(ii) What is portfolio VaR and diversified VaR and what is the difference?
(iii) What are the individual VaRs?
(iv) What is the incremental VaR?
(v) What are the component VaRs and percentage contributions?
(vi) If correlation is perfect (1.0), how will portfolio VaR compare to individual VaRs?

(i)
Kudos if you can use matrix math to derive (see XLS). But also,
Variance = (\$100^2)(10%^2)+(\$100^2)(14%^2)+(2)(\$100)(\$100)(0.20)(10%)(14%) = 352
Volatility = SQRT(352) = \$18.8
Or, you can use percentage weights instead of dollar positions:
Volatility = SQRT[(50%^2)(10%^2)+(50%^2)(14%^2)+(2)(50%)(50%)(0.20)(10%)(14%)] = 9.38%
(9.38%)(\$200) = \$18.8

(ii)
No difference!
With 99%, the normal deviate = NORMSINV(99%) = 2.33
Diversified VaR = (2.33)(\$18.8) = \$43.6
This is a relative VaR. No expected returns are given and expected return is not netted, which would b

(iii)
(\$100)(10%)(2.33) = \$23.26, and
(\$100)(14%)(2.33) = \$32.57

(iv)
The incremental VaR can be approximated with: marginal VaR * trade.
Assuming the marginal VaR = 0.159 (see next), and the trade is +\$10, then
approximate incremental VaR = (10)(0.159) = \$1.59
But please note that using the marginal VaR is only an approximation. The true incremental VaR is giv

(v)
First, we want the marginal VaR. Note in XLS we can get this two ways.
But, given that the betas are, respectively, 0.727 and 1.273,
Marginal VaR = Portfolio VaR/Portfolio Value * beta. In this case,
Asset #1 Marginal VaR = \$43.6/\$200 * 0.727 beta = 0.159
Asset #2 Marginal VaR = \$43.6/\$200 * 1.273 beta = 0.278
Component VaR = Position * Marginal VaR. In this case,
Asset #1 Component VaR = (0.159)(\$100) = \$15.87
Asset #2 Component VaR = (0.278)(\$100) = \$27.77
Percentage contributions are:
Asset #1 Component VaR % = \$15.87/\$43.6 = 36%
Asset #2 Component VaR = \$27.77/43.6 = 64%

(vi)
If correlation = 1.0, sum of individual VaRs will EQUAL portfolio VaR.
But for imperfect correlation (rho < 1), sum of individual VaRs will be GREATER THAN portfolio VaR.
Component VaR = Position * Marginal VaR. In this case,
Asset #1 Component VaR = (0.159)(\$100) = \$15.87
Asset #2 Component VaR = (0.278)(\$100) = \$27.77
Percentage contributions are:
Asset #1 Component VaR % = \$15.87/\$43.6 = 36%
Asset #2 Component VaR = \$27.77/43.6 = 64%

(vi)
If correlation = 1.0, sum of individual VaRs will EQUAL portfolio VaR.
But for imperfect correlation (rho < 1), sum of individual VaRs will be GREATER THAN portfolio VaR.
Sum of component VaRs, by definition, will be EQUAL to portfolio VaR.
100). Asset #1 has volatility of 10%, Asset #2

s?

14%) = 352

%)(14%)] = 9.38%

## HAN portfolio VaR.

HAN portfolio VaR.
A B C D Port
0.61% 0.20% 0.24% 0.64% 0.42%
0.02% 0.58% -0.30% 0.40% 0.18%
1.00% 1.45% 1.15% 2.15% 1.44%
1.55% 1.73% 1.76% 0.99% 1.51%
1.94% 1.87% 1.70% 0.89% 1.60%
1.85% 0.58% 0.54% 1.53% 1.12%
0.13% 0.52% 0.46% 0.30% 0.35%
0.82% 0.55% 0.53% 0.04% 0.48%
0.75% 1.30% 0.95% 1.13% 1.03%
2.05% 0.63% 1.15% 1.27% 1.27%
0.60% 0.76% 0.53% 0.60% 0.62%
0.82% 1.12% 0.33% 1.04% 0.83%
-3.70% -1.72% -1.67% -1.78% -2.22%
2.17% 2.22% 1.76% 3.09% 2.31%
1.24% 2.37% 1.91% 2.38% 1.98%
-0.83% 0.17% -0.55% 1.02% -0.05%
-1.00% 0.15% 0.41% 0.91% 0.12%
-1.11% -1.85% -1.69% -0.26% -1.23%
1.57% 1.45% 1.44% 2.76% 1.80%
-1.66% -0.81% -1.84% -1.07% -1.35%
-0.29% -0.10% 0.24% 0.26% 0.03%
0.77% 0.88% 1.28% 1.74% 1.17%
0.54% 0.32% 0.73% 0.93% 0.63%
-1.43% -2.26% -3.08% -1.66% -2.11%
-0.83% -0.73% -1.89% 0.12% -0.83%
-5.75% -2.44% -2.25% -3.18% -3.41%
-5.61% -5.37% -4.22% -1.48% -4.17%
-1.44% -1.88% -1.58% 1.85% -0.76%
-0.06% 0.63% 0.26% -0.14% 0.17%
2.21% 0.00% -0.37% 2.43% 1.07%
0.48% -1.08% -0.79% 0.70% -0.17%
-0.52% 0.19% -0.26% -0.04% -0.15%
1.62% 0.14% 0.51% -0.30% 0.49%
2.27% 1.37% 1.80% 2.10% 1.88%
0.31% 0.28% -0.38% 0.35% 0.14%
1.54% 1.30% 1.16% 0.28% 1.07%

## Mean 0.07% 0.13% 0.00% 0.61% 0.20%

Std Dev 1.94% 1.54% 1.47% 1.34% 1.46%
Skew -1.60 -1.48 -0.97 -0.60 -1.27
Kurt 2.86 3.39 0.67 0.82 1.73

VarCovarMat
0.000365 0.000246 0.000233 0.000198
0.000246 0.000231 0.000208 0.000140
0.000233 0.000208 0.000210 0.000138
0.000198 0.000140 0.000138 0.000175

CorrelMat
1.00000 0.84911 0.83976 0.78304
0.84911 1.00000 0.94580 0.69716
0.83976 0.94580 1.00000 0.72100
0.78304 0.69716 0.72100 1.00000
Total
Weights 25% 25% 25% 25% 100%
Position 100 100 100 100 400

Sample Population
Port Mean 0.20%
Port Vol 1.46% 1.44%
Port Vol 5.8324 TRUE 5.7508 5.8324
Variance 34.017 33.07
Port VaR ( Raw ) 13.568 13.38 13.568
Port VaR ( Rel ) -3.1900%

## Vol (Pop) 1.91% 1.52% 1.45% 1.32%

Vol (Sample ) 1.94% 1.54% 1.47% 1.34%
Sigma (x) 0.1 0.08 0.08 0.07

CL 99.00%
Z-Score 2.33
CF Mod 0.73

## Individual VaR 4.5057 3.5838 3.4211 3.1205

Slope 1.26 1.00 0.95 0.79
Beta 1.26 1.00 0.95 0.79
Marginal VaR 0.0427 0.0339 0.0324 0.0267 0.13568
Marginal VaR 0.0427 0.0339 0.0324 0.0267 0.13568

## Component VaR 4.2722 3.3864 3.2386 2.6710 13.568

31% 25% 24% 20% TRUE

## New Weights 33% 33% 33% 0% 100%

Increment 133.333 133.333 133.333 0 400
Incremetal VaR 5.6963 4.5153 4.3181 0.0000 14.530
-3.4304%
Modified
0 0 0 0 0.00069 0.00039 0.00041
0 0 0 0 0.00039 0.00049 0.00034
0 0 0 0 0.00041 0.00034 0.00031
0 0 0 0 0.00034 0.00022 0.00027

Modified
1.00000 0.84911 0.83976 0.78304 1.0000 0.6749 0.8796
0.84911 1.00000 0.94580 0.69716 0.6749 1.0000 0.8778
0.83976 0.94580 1.00000 0.72100 0.8796 0.8778 1.0000
0.78304 0.69716 0.72100 1.00000 0.8141 0.6282 0.9519

Sample Population

1.92% 1.89%
7.6695 7.5622
58.821 57.187
17.84 17.84182 17.592
-4.2584% -4.2584%

## 1.91% 1.52% 1.45% 1.32% 2.63% 2.21% 1.77%

1.94% 1.54% 1.47% 1.34% 2.67% 2.24% 1.80%
TRUE TRUE TRUE TRUE 0.18 0.14 0.13

## 0.8819 1.0544 0.5160

6.2138 5.2082 4.1799
6.2138 5.2082 4.1799

## Modified Beta 1.29 1.01 0.94

0.0574 0.0451 0.0417
0.0574 0.0451 0.0417

32% 25% 23%

## 33% 33% 33%

133.333 133.333 133.333
7.6560 6.0131 5.5666
0.00034
0.00022
0.00027
0.00026

0.8141
0.6282
0.9519
1.0000

1.60%
1.63%
0.11

0.4960
3.7857
3.7857

0.77
0.0342 0.178418
0.0342 0.178418

3.4151 17.84182
19%

0% 100%
0.000 400
0.0000 19.2357
-4.6069%