Portfolio Optimisation Using Value at Risk

Submitted on 25th June 2015

Optimal portfolios are normally computed using the portfolio risk measured in terms of its variance. However, performance risk is a problem if the portfolio does not perform well. This project involves using linear programming techniques to define and handle the “Value- At-Risk” risk metric.

By evaluating historical prices to create future scenarios one can determine the “Value-At- Risk” of a specified portfolio. Using linear programming software to develop a returns model for the FTSE 100 one can, hence, calculate which stocks should be bought or sold in order to minimise the “Value-At-Risk” of a portfolio with an underlying required returns constraint. The developed tool will look at multi-period scenarios and seek to optimise the portfolio accordingly.

This report documents the analysis of current ways of measuring single period “Value-At- Risk” and the formulation of a unique method of calculating multi-period “Value-At-Risk”. It goes on to describe an application which implements this model and highlights the results of exhaustive testing of the application.

Imperial College London
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Vinay Kaura
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