1 introduction
The second project you are going to do will apply what youve learned in this
class to a realistic situation. After the crisis of 2008 when the current framework
of risk management disproved itself, the emphasis of the regulators moved to
the stress scenario framework. In this framework you shock your portfolio to try
and envision what will happen with your portfolios if things go wrong. Your job
will be to apply those scenarios to the portfolios given below and recommend
action to withstand the shocks predicted.
2 Stress Scenarios - Federal ReserveFor the
scnerios please use:
1. Table A.3 in the document ( 2020 Treasury and Dow Jones Index )
2. Table A.5 the same variables. ( 2020 Treasury and Dow Jones Index)
1. Look on the severe and adverse scenarios and list the shocks to the different
factors
2. each Federal Reserve factor find an index that corresponds to this factor
that you will actually shock
3 data download
Once you identified the different indices you like to shock download the data
from Bloomberg for these indices or alternatively download it from: https:
//fred.stlouisfed.org. ( 10 years of history)
1. Calculate the Variance of the indices ( after you convert them to returns)
2. Calculate the expected return ( after the conversion!) Watch out for
units!!
You must do this exercise in Matlab or R. Excel code will be rejected and
automatically qualified as project failure.
4 Portfolio Shocks
The shocks you create are synthetic portfolio shocks. For each of the portfolios
below determine what will be the impact of portfolio stress tests. Supply
confidence intervals for your calculated regression coefficients. You can supply
the confidence intervals for the shocks themselves though it’s a much trickier
business. Data downloads must be done either from BB or St.Lious Fed. Any
other data source will be rejected.
1. Total stock market portfolio ( use the total stock market index as your
proxy)
2. 60% equity and 40% bonds portfolio ( use ML Broad index to model bonds
from St.Louis )
3. 50% equity and 50% US short bonds portfolio
4. 50% equity and 20% high yield and 30% treasury.