Homework 2: Conducting a Risk Analysis
Due: Nov 30, 2025 at 10:00 PM
Tasks:
Using the returns of the Telfer Capital Fund (TCF) and the Benchmark (BM; see attached file), compute the following:
1) For the TCF portfolio estimate the alpha and the betas using the Fama-French-Carhart model. Do the same using the Fama-French 5-factor model. You can find the factors from Kenneth French data library. For the market please use the BM and for the risk-free rate use that one in the excel file. Use all the data and then try to change the estimation period and use only the last 3 years of data. Please comment the results and provide coefficient estimates together with t-stats.
2) Decompose the total volatility of TCF into a systematic component and idiosyncratic.
3) Compute the tracking error for TCF
4) Value at risk (VaR) is a statistic that quantifies the extent of possible financial losses within a firm, portfolio, or position over a specific time frame. As the most important concept for risk management, VaR have been studied by researchers from different disciplines and hence has many different versions of tests. Please estimate the 1-year 5% VaR of TCF using three different methodologies. Include in your report the results in a nice format and the answer to the following questions:
a) What are your model assumptions?
b) How do you interpret the results?
c) Discuss the different VaRs and select a value that you would bring to the head of risk management? Why did you select that particular value?
5) Given the short time-series of the returns data, you want to run a stress testing scenario at the portfolio level. Use information from recent crises (e.g., financial crisis) to design a stress test. What is the expected loss?