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.
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).
Market Risk Measurement 127
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