Using VaR and CVaR to manage risk from investments in High-Dividend Securities (SETHD)

Abstract

The objective of this independent study was to examine how risk could be reduced after portfolio adjustment by using Value at Risk and Conditional Value at Risk, which is the average value of excess risk. Considering the securities with the highest Sharpe ratio of 7 securities from a total of 35 securities using daily closing price and dividend from January 5th 2014 to December 28th 2018 in the SETHD were chosen to be samples for studying. Then, find the initial investment weight of the Tangency portfolio, which is the portfolio with the highest Sharpe ratio. A period of trial was every two weeks twenty six times since January 2nd 2019 to December 30th 2019. One was to invest without portfolio adjustment, another was with portfolio adjustment. In this study, the VaR and CVaR calculated by using historical simulation approach every 2 weeks, then set the average VaR and CVaR of the portfolio without weight adjustment to the maximum VaR and CVaR of the portfolio with weight adjustment.

The result of the study found that the portfolio with weight adjustment every 2 weeks has the rate of return to Value at Risk 20.42 and 14.59, and the rate of return to Conditional Value at Risk of 15.07 and 10.54 at the confidence level 95 and 99 percent respectively, which is greater than the portfolio without weight adjustment has the rate of return to Value at Risk 16.60 and 11.38 and the rate of return to Conditional Value at Risk of 12.81 and 8.93 at the confidence level 95 and 99, respectively. It can be concluded that the portfolio with weight adjustment every 2 weeks, at the end of the investment period, receives more return than the portfolio without weight adjustment. In addition, there is a higher rate of return than the same Value at Risk or Conditional Value at Risk.