Question

An investor owns 12000 shares of a particular stock. The current market price is 100.what is the "worst case" value of the portfolio in six months. For the purpose of this question, define the worst case value of the portfolio as the value which is such that there is only a 1% chance of the actual value being lower. Assume that the expected. Return and vitality of the stock price are 8.5% and 23% respectively.

Answer 1

let assume : Expected Return is for 6 months

(In case you assume it to be annual take the value as =8.5/2=4.25%)

Step1

Given

No.of shares=12000

Current market price = R100

Return =8.5%

Vitality (Standard Deviation)=23%

Confidence Level= 99%

The above information is provided to calculate VALUE AT RISK

It mean the value of risk, How risky an investment is. Hence worst case scenario can be anlaysed by the following formula

STEP2

Value at risK(VAR) of A portfolio

VAR=mean+(Zvalue * Standard deviation)

Mean in this case is Expected return

Z value as per normal distribution table for 1% is -2.33

8.5% -2.33*23% = -45.09%

Step 3 Worst Case Scenario(WCS) for the portfolio

Value of portfolio=12000*100= Rs: 12,00,000,

WCS = Value of portfolio*(1+var)

=1200000*(1+(-0.4509))

=1200000*(1-0.4509)

=1200000*(0.54910)

WCS= Rs: 658920