Financial Management & Corporate Finance Case Study

COVID-19 Pandemic and Portfolio Value at Risk

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Abstract:
Value at Risk (VaR) quantifies the extent of possible financial losses within a firm or portfolio over a period of time at a given confidence level (under normal business conditions). Correlations among different asset classes constantly change over a period of time and it throws up interesting insights during crises period. Correlations play an important role in portfolio construction and have an impact on portfolio VaR. The case discusses how the pandemic affected portfolio risks and returns and how VaR can be a useful risk measurement tool. The case also goes into determination of VaR using parametric method and historical simulation method while covering its limitations.

Pedagogical Objectives:

• To discuss the role of correlations among the assets in portfolio construction.
• To understand the changing behaviour correlations during crisis period compared to normal period.
• To discuss how to determine VaR using Variance Covariance Method and Historical Simulation Method.
• To assess how the portfolio of assets with less correlation helps in reducing the VaR.
• To understand the limitations of VaR.

Keywords : Value at Risk; Correlation; Portfolio; Index; COVID-19; Pandemic; Confidence Level; Historical Method; Parametric Method; Montecarlo Historical Simulation; Portfolio Construction; Risk Management; Portfolio Performance