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# Financial Risk Management – Assignment 3

1. A stock earns the following returns over a five-year period: R1 = 0.30, R2 = -0.20,
R3 = -0.12, R4 = 0.38, R5 = 0.42, R6 = 0.36. What is the expected return and ex-
ante risk for the stock?

## State of the Economy Probability of Occurrence Rate of Return

Boom 0.20 30 %
Normal 0.50 18 %
Recession 0.30 9%

## What is the expected return and standard deviation of return?

3. Calculate the Value at Risk in a Rs. 200 crores bond portfolio, based on the
following historical data of return on the similar portfolio, at 90%, 95% and 99%
confidence interval.

Historical return
Year Return %
2005 7.55
2006 7.20
2007 7.25
2008 6.90
2009 7.10
2010 7.35
2011 8.10
2012 8.50
2013 8.75
2014 8.15
2015 8.50

CI z score
90% 1.645
95% 1.96
99% 2.576

4. Calculate the net expected value of the exposure under the following scenarios.

## Credit Grade ----> CG12 (Current) CG13 (Scenario 1)

CG13 (Scenario 2)
Loan Amount Rs lakhs 2000 2000 2000
Probability of Default (PD) 1.20% 1.94% 1.94%
Net Margin 3.20% 4.00% 3.20%
Expected Recovery in case 0.00% 0.00% 2.00%
of default