FIN5MRM-Backtesting VaR Models Report Writing – Management Assignment Help

Assignment Task

Task

Question 1:

The annual volatilities of Stocks A, B, and C are 12%, 7%, and 9%, respectively. The correlation between Stocks A and B is -0.3; the correlation between Stocks A and C is 0.1; the correlation between Stocks B and C is 0.12. Solve for the covariance matrix for the three stocks.

Question 2:

Say that a bank reports 9 exceptions to its 99?ily VaR over the last year (252 days). Give two interpretations of this observation.

Question 3:

Suppose that we backtest a VaR model using 1,000 days of data. The VaR confidence level is 99% and we observe 17 exceptions. Should we reject the model at the 5% confidence level? Use a one-tailed test.

Question 4:

A bank reports 9 exceptions to its 99% VaR over the last year (252 days). Using the normal approximation to the binomial distribution, compute the z-statistics, and discuss whether the results would justify rejecting the model. 

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