[R-SIG-Finance] Portfolio Value at Risk - A conceptual problem

[Patrick Burns]

You can use the valuation of the whole
portfolio to calculate the returns.
That is probably the easiest approach.
That should reduce your Problem C -- it
shouldn't matter what your assets are
as long as you have valuations for them
at each timepoint.

I'm guessing that you might have tried
approach B and got a different answer.
If so, then the following should tell
you what went wrong:
http://www.portfolioprobe.com/2010/10/04/a-tale-of-two-returns/
(You can do it that way, but it's a bit
trickier.)

On 20/10/2010 10:41, Amy Milano wrote:
> Dear all,
>
> I am having following conceptual problem when I am trying to find out Value at Risk (VaR) for the portfolio. I am just giving an indicative portfolio.
>
> (a) stocks (equity) of 3 different companies say e.g.
>
> E1   500 equity shares
> E2 1000 equity shares
> E3   100 equity shares
>
> I have closing prices for last 1 year (i.e. say 250 days) and thus I obtain 250 portfolio values by multiplying the respective number of equity shares by respective closing prices and add them.
>
> Thus, I have 250 portfolio values. I obtain 249 portfolio returns using "LN".
>
> Problem (A)
>
> My problem is is my method of calculating returns correct?
> In the sense, should I calculate returns for all these 3 companies separately (unlike calculating the portfolio value by adding the values of these 3 companies together) and then carry out the further analysis like calculating the correlation matrix etc.
>
> Problem (B)
>
> If I were to consider returns separately for the above three companies, what will happen if there are say 5000 companies (equity only) in my portfolio? How do I handle these many companies?
>
> Problem (C)
>
> How do I proceed if besides having equity, I also have debt and forex transactions also. (Please note that I am asking these questions (especially Problem (C) form calculating returns point of view as say for Forex transactions, I consider the spot exchange rates and the LIBOR rates (depending on the currency and the maturity period) as risk factors and calculate the Mark to Market (MTMs) values.
>
> So my problem basically is how do I arrive at returns in a portfolio.
>
> I apologize if I have not put up the problem in correct and short words. Please forgive and guide me,
>
> With regards
>
> Amy
>
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-- 
Patrick Burns
patrick at burns-stat.com
http://www.burns-stat.com
http://www.portfolioprobe.com/blog