1 introduction
The 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 Reserve
https://www.federalreserve.gov/publications/files/2021-dfast-results-20210624.
pdf this is going to be your source document for domestic scenarios. For 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 yahoo finance 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 Python 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
1. Russell portfolio ( use the total stock market index as your proxy)
2. 60% Russell equity and 40% bonds portfolio ( use ML Broad index to
model bonds from St.Louis )
3. 50% Russell and 50% US short bonds portfolio
4. 50% Russell quity and 20% high yield and 30% treasury.