Project: Portfolio Management – Content and Structure of the Report

Prof. Zbigniew Krysiak

Model GARCH
▪ You must build GARCH models for 10 companies traded on the Stock Exchange on-
the-basis of historical data for 5 years from 1 January 2014 till now
▪ Estimate parameters alpha, beta, gamma
▪ Provide daily graphs for historical standard deviation and Moving Average (100 days)
▪ Provide the forecast of the standard deviation in horizon up to 300 days
▪ Present charts of forecasted volatility in the GARCH
▪ Compare the parameters of the GARCH model for all companies in form of the table:
name of the company, alfa, beta, gamma, long run standard deviation, min std dev,
max std dev, (max std dev – min std dev) – both on daily and annual basis

Assessment of VaR for portfolio of shares both historical and forecasted volatility
▪ You should build a portfolio consisting of 10 shares listed on the stock exchange
▪ Calculate correlations for each pair of Companies
▪ Calculate the standard deviation of returns for each company
▪ Assess the coefficients of Cholesky matrix
▪ Provide a form correlated stochastic processes for each stock in the portfolio
▪ Assume portfolio value of 1 000 000
▪ Forecast VaR using Monte Carlo for any day in the future
▪ Determine that the structure of the portfolio: w1, w2, w3, …. w10 so that VaR is
minimal. VaR->min (solver) (99%)
▪ Create distributions for modeled standard deviation Moving Averages and for each
suggest the generator to run``` Monte Carlo Simulation.
▪ Show the distribution of VaR in the forecast
▪ Provide a theoretical model, data, results and conclusions in a report in the word.
▪ Provide models in Excel

Finals are individual. Each student presents his own models in form of excel files and one-word
document placed in the folder. Report in word document should have more than 20 pages!!!

Th name of the folder should be as: Family Name, First Name, Index. The word document report
should be stapled in free places at the rand. No folia or other envelopes, please!!!!
Examples of selected questions and cases for finals
1. Draw the normal distribution and explain the basic features.
2. Present the definition and formula of standard deviation of the rates of return.
3. Draw the formula for logarithmic rates of return.
4. Derive from general formula of standard deviation of the rates of return the formula
for daily standard deviation.
5. Write down the formula for GARCH (1,1) model and explain the components in that
formula.
6. Present the formula for forecasting volatility as derived based on the GARCH (1,1)
model and explain the meaning of all components on graph.
7. Draw and explain parameters of the normal standardized distributions N (0,1).
8. Does the forecasted volatility in GARCH model depends on gamma? Explain based on
the formula?
9. Draw the graph of the forecasted volatility when alfa->1, beta ->1, gamma ->1
10. Explain the meaning of alfa, beta and gamma in GARCH (1,1) model.
11. Explain the procedure and important details to run the Monte Carlo Simulation.
12. Put formulas for correlations and covariance.
13. Put formula for GARCH (1,1) model applied for modeling the covariance.
14. Put formula for forecasted covariance based on the GARCH (1,1) model.
15. Explain how to estimate the interval for average value in the population and how you
apply this at Monte Carlo Simulation.
16. Explain and present the Cholesky Decomposition for example for 5 assets.
17. Draw the graph for historical volatility of alfa->1, beta->1, gamma->1.
18. Explain, how is derived generator for any type of the distribution, which is then used
at the Monte Carlo Simulation.
19. Explain the process of building the assets portfolio including the GARCH, Monte Carlo
Simulation, Cholesky Decomposition supported by Solver in Excel.
20. Explain how the Value at Risk is calculated and minimized by obtaining the portfolio
structure.
21. Case 1(22.8): Assume that S&P500 at close of trading yesterday was 1040 and the
daily volatility of the index was estimated as 1% per day at that time. The parameters
in a GARCH (1,1) model are 𝜔 = 0,000002; 𝛼 = 0,06; 𝛽 = 0,92. If the level of the
index at close of trading today is 1060, what is the new volatility.
22. Case 2(22.10): The parameters of a GARCH (1,1) model are estimated as 𝜔 =
0,000004; 𝛼 = 0,05, and 𝛽 = 0,92; What is long-run average volatility and what is
the equation describing the way that the variance rate reverts to its long-run average?
If the current volatility is 20% per year, what is the expected volatility in 20 days?
 Structure of the Report
1. Present the theory of modeling volatility in GARCH (Present GARCH model,
description of Maximum Likelihood Method, estimation of historical
volatility and alfa, beta, gamma parameters)
2. Describe procedure of forecasting the volatility
3. Present the Cholesky Decomposition
4. Present procedure of putting the portfolio including Monte Carlo
Simulation
5. Present the input data – company/stock you apply in portfolio
6. Present the results of GARCH models for applied stock and analyze them
including the comparison table and graphs for forecasted volatility
7. Show the structure of the portfolio under assumption that VaR -> min
8. Show the distribution of the VaR to ensure the flexibility for allocation of
the capital in the future
9. Show the procedure of creating the generator for any distribution of
volatility as an input to the Monte Carlo Simulation
 Final Project:
„Portfolio Management”

Lecturer
Prof. Zbigniew Krysiak

Semester Summer 2019

MDI Gurgaon

First and Second Name of the Student

Number on the List

Date of the finals:

Self-evaluation of the project made by student (ranked 1 – 10):

Evaluation of the project made by professor (in the range of 1-30 points):