Risk Mesaurement on mix portfolio with fixed income and equity

cchien · Post by **cchien** » Thu Jun 23, 2011 4:42 am

Hi all,

I'm risk analyst for life company. Now, I want to quantify market risk from portfolio. Anyone know popular and benchmark technique method for managing portfolio with fixed income and equity ? Fixed income includes simple bond and complicated bond, like callable bond, structured notes..... I just know factor model which build by PCA method if risk factors were high correlation...... Besides factor model, something else ?

polysena · Post by **polysena** » Thu Jun 23, 2011 6:03 pm

CChien your question is not super clear- what is the aim of your market risk quantification pb? management and/or solvency?

cchien · Post by **cchien** » Fri Jun 24, 2011 3:30 am

Hi Polysena,

Sorry for my question that confusing your guys. In my work, I just work for management on risk and then report risk to vice-president. It's hard to quantify risk from mixed portfolio with hybrid equity and interest rate factor.

aaron · Post by **aaron** » Thu Jun 30, 2011 3:36 am

This is why VaR was invented. It's nearly impossible to combine specific risk measures like Beta for equities and duration for bonds in meaningful ways. VaR works for any portfolio.

cchien · Post by **cchien** » Thu Jun 30, 2011 5:55 am

Dear AAron,

Thanks for your comment. It's true ! So, if I was asked one question what effect is being on portfolio if one risk factor had changed or two factors.... shall I use factor model for that, is it enough ? Or factor model can explain over 70% effect ? If it is, I think it can be my tool for measure market risk, besides VaR.

aaron · Post by **aaron** » Sun Jul 03, 2011 3:59 am

While it depends on the portfolio, my guess is an equity index by itself accounts for over 70% of your total variance. Interest rates will make up a big chunk of the rest. After than will be some marginal factors.

Of course, if you have a highly offset or levered portfolio, or use derivatives or structured products or exotic instruments, it might be different.