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    Under some bank regulation, the bank manager maintains the Value-at-Risk 5% of the portfolio return being -2.5% or above. Find a portfolio that satisfies the regulation and achieve an average return of 4% or above. Report your portfolio and simulation outcomes (histogram, mean and 5% percentile).

    A bank manager considers an investment strategy. She has three options: a stock for a big company, a bond and a stock for a start-up company, whose stock returns are denoted by SB, BB, and SS, respectively. It is known that SB and BB follow normal distributions: SB~N(8%,10%) and BB~N(2%,1%) and SB and BB have a correlation of -0.5. SS are independent of both SB and BB, and has discrete distribution:

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    1. Using @Risk or equivalent software, simulate returns of SB, BB and SS and fill out the following summary statistics of simulated data. Use percentage returns up to 2 decimal points (for instance, 3.99%).

     

     

    BBSBSS
    Mean
    Median
    Standard deviations
    Interquartile Range

     

     

    1. The bank manager asks you which investment you recommend among the following four strategies.

     

     

    1. For each investment strategy, report a histogram of simulated returns and also report a table including summary measures (Minimum, Maximum, Mean, 90% CI, Mode, Median, Std Dev).

     

    1. Among four strategies, which one is the best and the worst strategy in terms of average return?

     

    1. Which one is the safest strategy in terms of standard deviations?

     

    1. Under some bank regulation, the bank manager maintains the Value-at-Risk 5% of the portfolio return being -2.5% or above. Find a portfolio that satisfies the regulation and achieve an average return of 4% or above. Report your portfolio and simulation outcomes (histogram, mean and 5% percentile).

     

     

     

     

    Questions 2 (40 marks=5 + 5 + 10 + 10 + 10)

     

    Suppose that you were wondering whether to open a café. There are two choices: Strategy #1 is not to open (Not IN) and Strategy #2 is to open (IN). The table below shows unit price and cost per customer and a fixed cost per day in dollars (note: you have to pay the fixed cost, such as a rent every day regardless of the number of customers.)

     

    Strategy#1#2
    DecisionNot ININ
    Unit Price03.5
    Unit Cost01.5
    Fixed Cost0500

     

    The number of customers varies according to weather condition and you consider the following probability table.

     

    Probability#Customer
    Sunny0.75600
    Rainy0.25260

     

    If you do not open a café, then you can invest your asset into a fixed income security, which generates a return of $380 per day.

     

    1. Fill out a table below regarding risk profiles for profits according to strategies and weather conditions. [Hint: profit is given by # customers * (unit price – unit cost) – fixed cost.]

     

    Strategy#1#2Probability
    Sunny
    Rainy

     

     

    1. Obtain Expected Monetary Value (EMV) for two strategies.

     

    Strategy#1#2
    EMV

     

    1. Draw a decision tree by using PrecisionTree software. [Hint: your tree has four end nodes.]

     

    1. Conduct a one-way sensitivity analysis by varying the probability of being sunny. Use base-value +/-25% with 11 steps. [Hint: your original file has to set up the probability of rain as a formula of (1 – the probability of being sunny), rather than a value of 0.25.] Report a sensitivity graph and a strategy region graph (EMV and variations in the probability) and discuss which strategy is the best in terms of EMV (30 words or less).

     

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