Intro to Risk and Insurance

Project

Consider you are a portfolio and risk manager of financial securities. Your portfolio consists of four publicly traded companies from any industry or sectors. The portfolio should include at least one insurance firm or bank. The firm should be publicly traded at New York Stock Exchange (NYSE), NASDAQ, or other stock markets. Go to Finance.Yahoo.Com or other website and download historical daily stock price data (1001 days) for the companies of your choice. Make sure that you work with the Adjusted Closing Price since it has been adjusted for dividends and stock splits to produce a consistent data series.You are requested to prepare a written report that addresses the following problems:
Section I (100 points)( Word document 3 pages in length)

1. Discuss why you choose those specific companies for the composition of your portfolio.

2. Identify the relevant sources and/or types of internal and external risks that could materially affect your selected company's short-term and long-term performance (this should be done separately for each company).

3. Describe detailed techniques the companyselects to deal with those identified risks. Discuss any risk management techniques you would like to suggest to either eliminate the source of risk or better manage those risks.

4.Analyze some costs and benefits of each risk management techniquethe companyselects and you suggest.

5. Discuss whether and how corporate risk management adds firm value using specific examples based on the discussions above.

Section II (Excel)

Choose one company from your portfolio.

1. Compute the daily returns for the company you selected.

2. Compute the first four moments of your daily stock return distribution using excel functions.

a. Mean

b. Standard deviation

c. Skewness

d. Kurtosis

3. Construct a frequency distribution for your company's stock return series. When you select classes (bins or discrete intervals), use the Standard Deviation ( ) running from -6σ to +6σ such as -6σ,-5.5σ, -5σ, -4.5σ,...,0,...,+5.5σ,+6σ. In some cases, you may need further ranges from -9σ to +9σ or more if your company's return series are more volatile. Provide a histogram of frequency distribution.

4. Transform your frequency distribution to a probability density function, pdf. Provide a table of probability density function.

5. Using the pdf that you identified above, construct the cumulative distribution function (cdf) for your stock return series and present it in both tabular and chart forms.

6. Test whether your stock return seriesare normally distributedusing

a. Z-test for skewness at 5% significance level
Which way is it skewed?

b. Z-test for kurtosis at 5% significance level

Does it have fat or thin tails?

Section III (Excel)

Choose one company from your portfolio. Using 1001 days of historical data on the adjusted closing prices of your selected company and variance-covariance methodology,

1. Compute the One-Day%VaR with a 95% confidence leveland interpret it.

2. Assuming that you currently have a mark-to-market position in your stock of $100,000, compute and interpret the One-Day $VaR with a 99% confidence level.

Use 1001 days of historical data on the adjusted closing prices of fourcompanies.Assuming that you currently have a mark-to-market position in your portfolio of $100,000, you or your group determines allocating dollar amount investment to each company.

3. Calculate the One-Day $VaR for your portfolio with 99% confidence level using Historical Simulation method and interpret the resulting One-Day $VaR estimate.

Note:This is an open-ended project. I will pay more attention to the quality and thoroughness of your written analyses.Your reportfor Section I should be typed and turn in a hard copy at the beginning of class. Both Excel file you have worked for Section II and Section III and report (word file) should be submitted to Canvas.