Kapitel 3 Portfolios

Question 1

What is a portfolio?

Answer 1

A portfolio is a collection of different asset positions which are owned by the same investor, group of investors or the same company.

Question 2

How does the risk of a portfolio differ from the risk of the individual positions ?

Answer 2

A portfolio’s risk is lower than the risk of its individual positions because the positions tend to move in different directions, reducing the overall risk.

Question 3

What is the volatility of a portfolio?

Answer 3

The volatility of a portfolio is a measure of how much the value of the portfolio fluctuates over time. It is calculated by taking the standard deviation of the returns of the portfolio.

Question 4

Why is the volatility of a portfolio not equal to the weighted average of the volatilities of the individual portfolio constituents?

Answer 4

A portfolio’s volatility is not the weighted average of its constituents’ volatilities due to compensation effects between positions. This can result in a lower overall portfolio volatility than the weighted average of individual positions.

Question 5

How are covariance and correlation coefficient used to measure the interdependencies between the positions in a portfolio?

Answer 5

Covariance is a measure of how much the returns of two assets move together. Correlation coefficient is a measure of how closely the prices of two assets move together. Both covariance and correlation coefficient can be used to measure the interdependencies between the positions in a portfolio.

Question 6

What is portfolio selection?

Answer 6

Portfolio selection is the process of choosing the assets that will make up a portfolio. The goal of portfolio selection is to create a portfolio that has the desired level of risk and return.

Question 7

How does portfolio selection impact the return of the investment?

Answer 7

Portfolio selection can impact the return of the investment in two ways. First, the choice of assets can impact the expected return of the portfolio. Second, the diversification of the portfolio can impact the volatility of the portfolio.

Question 8

What is the beta of a portfolio?

Answer 8

The beta of a portfolio is the weighted average of the betas of the assets in the portfolio.

Question 9

What is the importance of beta?

Answer 9

Beta is an important measure of risk because it can be used to estimate the risk of a portfolio. A higher beta means that the portfolio is more risky, while a lower beta means that the portfolio is less risky.

Question 10

What is historical simulation?

Answer 10

Historical simulation is a non-parametric approach to estimating value-at-risk (VaR). It does not require any distributional assumptions about the underlying risk factors. Instead, it uses historical data to generate a distribution of possible outcomes.

Question 11

How does historical simulation work?

Answer 11

Historical simulation works by first collecting historical data on the risk factors that drive the value of the portfolio. These risk factors can include stock prices, interest rates, and exchange rates. The next step is to calculate the resulting returns for each historical data point. These returns are then sorted from worst to best. The quantile of interest is then determined by counting the number of returns that are worse than the quantile of interest.

Question 12

What are the benefits of historical simulation?

Answer 12

The benefits of historical simulation include:
It is relatively easy to implement.
It does not require any distributional assumptions.
It can be used to estimate VaR for any type of asset or portfolio.

Question 13

What are the limitations of historical simulation?

Answer 13

The limitations of historical simulation include:
It is only as good as the historical data that is used.
It is not as accurate as parametric methods when the underlying risk factors are not normally distributed.
It can be sensitive to outliers in the historical data.

Question 14

What is backtesting?

Answer 14

Backtesting is a method of evaluating the accuracy of a VaR model by comparing the model’s predictions to actual losses.

Question 15

What is the purpose of backtesting?

Answer 15

The purpose of backtesting is to ensure that a VaR model is providing accurate and reliable estimates of risk.

Question 16

How is backtesting done?

Answer 16

Backtesting is done by using historical data to generate a series of simulated losses. The model’s predictions are then compared to the actual losses to see how closely they match.

Question 17

What are the limitations of backtesting?

Answer 17

There are a number of limitations to backtesting, including:
-The accuracy of backtesting is dependent on the quality of the historical data used.
-Backtesting cannot account for changes in market conditions or the composition of a portfolio over time.
-Backtesting can be computationally expensive, especially for large portfolios.

Question 18

What are Lower Partial Moments (LPMs)?

Answer 18

Lower Partial Moments (LPMs) are a set of risk measures that focus on the downside risk of an asset or portfolio. LPMs are calculated by taking the n-th percentile of the asset or portfolio’s return distribution and then measuring the average loss below that percentile.

Question 19

Why are LPMs important?

Answer 19

LPMs are important because they can provide a more accurate measure of risk than traditional risk measures, such as variance and standard deviation. This is because LPMs focus on the losses that are most likely to occur, rather than the average loss.

Question 20

What are some of the benefits of using LPMs?

Answer 20

Some of the benefits of using LPMs include:

-LPMs can provide a more accurate measure of risk than traditional risk measures.
-LPMs can be used to identify assets or portfolios that are more likely to experience losses.
-LPMs can be used to construct risk-adjusted performance measures.

Question 21

What are some of the limitations of using LPMs?

Answer 21

Some of the limitations of using LPMs include:

-LPMs can be more difficult to interpret than traditional risk measures.
-LPMs can be more sensitive to changes in the data.
-LPMs can be more computationally expensive to calculate than traditional risk measures.

Question 22

What are the two alternative approaches for obtaining portfolio VaR using historical portfolio values?

Answer 22

The two alternative approaches for obtaining portfolio VaR using historical portfolio values are hybrid approaches that combine non-parametric and parametric methods.

Question 23

What are scoring models and how do they offer a solution in risk assessment?

Answer 23

Scoring models, also known as scoring models or Nutzwertanalysen, offer a solution in cases where direct monetary measurement and probability specification are not possible.

Question 24

How do scoring models assist in assessing credit risk?

Answer 24

Scoring models, such as credit scoring models, are used to evaluate credit risk by assigning scores or ratings to borrowers based on various predetermined criteria. These criteria can include factors such as credit history, income level, and other relevant indicators.

Question 25

What type of risks are scoring models particularly useful for?

Answer 25

Scoring models are particularly useful for measuring risks that are not directly quantifiable.

Question 26

What can be evaluated using scoring models?

Answer 26

Scoring models can be used to evaluate creditworthiness, default probability, or other risk factors.

Question 27

What is the goal of sensitivity analysis in risk analysis?

Answer 27

The goal of sensitivity analysis is to understand the sensitivity of a particular risk to changes in its underlying risk factors. It helps assess how changes in risk factors impact the overall risk.

Question 28

What does Marginal VaR measure in a portfolio context?

Answer 28

Marginal VaR measures the sensitivity of the portfolio Value at Risk (VaR) to changes in the size of an asset position. It quantifies how the portfolio’s risk level is affected by variations in the size of a specific asset within the portfolio.

Question 29

What does a scenario analysis examine in risk analysis?

Answer 29

A scenario analysis examines the impact of changes in multiple risk factors simultaneously. It assesses how different combinations of changes in risk factors affect the overall risk.

Question 30

What is the purpose of classifying risks?

Answer 30

The purpose of classifying risks is to distinguish between relevant or major risks and irrelevant or minor risks. It helps prioritize the allocation of resources and attention to effectively manage and mitigate the most significant risks.

Question 31

What are some challenges associated with sensitivity analyses?

Answer 31

Sensitivity analyses in risk assessment face the following challenges:

-Difficulty in determining the reasonableness of a change in a risk factor.
-Lack of consideration for the likelihood of a specific change in the risk factor.
-Limitation to changes in only one risk factor, requiring scenario analyses to assess multiple factors simultaneously.

Question 32

What are some common standard scenarios used in scenario analysis?

Answer 32

Common standard scenarios used in scenario analysis include:

Best case scenario: Represents the most favorable and optimistic conditions.
Base case scenario: Represents the expected or most likely conditions.
Worst case scenario: Represents the most adverse and pessimistic conditions.

Question 33

What are stress tests in scenario analysis?

Answer 33

Stress tests evaluate a company’s ability to recover from crises by testing sudden changes and extreme scenarios. For example, the ECB conducts stress tests for banks to assess their stability during severe economic downturns.

Question 34

What challenges arise when determining the total risk position or risk exposure of a company?

Answer 34

When determining the total risk position or risk exposure of a company, the following challenges may arise:

Some individual risks may not be measurable.
Measurable risks may have been assessed using different methods or approaches.
Individual risks may be correlated, either compensating or amplifying each other’s effects.

Question 35

What are risk coverage funds?

Answer 35

Risk coverage funds are a portion of the risk coverage potential that has been specifically set aside to cover existing risks.

Question 36

How does the risk exposure of a company relate to its risk coverage funds?

Answer 36

The risk exposure of a company should not exceed its risk coverage funds. As long as the risk exposure remains within the available risk coverage funds, the company’s risk-taking capacity is not violated.

Question 37

What is the risk coverage potential of a company?

Answer 37

Risk coverage potential is the maximum financial reserves a company has to cover realized risks, determined by its performance indicators and substance, including equity capital and reserves.