Quantitative Finance for Physicists

11.3 REFERENCES FOR FURTHER READING

The Jorion’s monograph [1] is a popular reference for VaR-based

risk management. The Dowd’s textbook [2] is a good resource for the

modern risk measurement approaches beyond VaR.

11.4 EXERCISES

1. Consider a portfolio with two assets: asset 1 has current value $1

million and annual volatility 12%; asset 2 has current value $2

million and annual volatility 24%. Assuming that returns are

normally distributed and there are 250 working days per year,

calculate 5-day VaR of this portfolio with 99% confidence level.

Perform calculations for the asset correlation coefficient equal

to (a) 0.5 and (b) 0.5.

2. Verify (11.2.4).

*3. Implement the algorithm of calculating ETL for given P/L

density function. Analyze the algorithm accuracy as a function

of the number of integration points by comparing the calcula-

tion results with the analytic expression for the normal distribu-

tion (11.2.4).

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