Sheet index:

T1.1-IntroVar(1and2assets)
T1.1-autocorrelated-returns
T1.1-HSVaR
T1.1.A-WACC
T1.1.A-WACC-2
BT 302.1
T1.1-IntroVaR: Single-asset VaR and Two-asset Portfolio VaR
Left-hand panel is single-asset VaR. This assumes a normal distribution per =NORM.S.INV() but VaR does not re
Right-hand panel is two-asset VaR. Requires a correlation parameter
Please note: input assumption are almost always given in per annum term; e.g., 10.0% volatility per annum

Single-asset delta normal VaR Two-asset Relative delta normal ¶ VaR

Trading days per year 250 Trading days per year
VaR horizon (days) 1 VaR horizon (days)
VaR confidence level, c 95% VaR confidence level, c
Normal (one-tailed) deviate 1.64 Normal (one-tailed) deviate

Asset Value ($) $200.0 Portfolio Value ($)

Volatility, per annum 10.0%
E[return], per annum 0.0%

Value at Risk (VaR), per annum, % 16.4% Volatility (per year)

Value at Risk (VaR), per annum, $ $32.90 Portfolio Weight (w)
Value at Risk (VaR), horizon, % 1.04% Individual VaR, per annum, $
Value at Risk (VaR), horizon, $ $2.08 Individual VaR, horizon, $

Correlation, ρ(A,B)

Portfolio volatility, per annum, %

Portfolio VaR, per annum, %
Portfolio VaR, annual, $
Portfolio VaR, horizon, $
Portfolio VaR, horizon, $ (same)
M.S.INV() but VaR does not require normality

10.0% volatility per annum

ormal ¶ VaR
250
1
95%
1.64

$200.0

Asset A Asset B
11% 20%
45% 55%
$16.28 $36.19 Asset has an individual $VaR, per annum = (%Weight * Portfolio $Value) * volatility * devi
$1.03 $2.29 Apply the square root rule: multiply by SQRT(horizon/250), but his assumes i.i.d.

- We need this to compute portfolio volatility. Imperfect correlation (< 0) implies that portfo
If correlation = 1.0, then and only then, will the sum of individual VaRs = portfolio VaR.
12.06%
19.84%
$39.68
$2.51
$2.51
io $Value) * volatility * deviate
t his assumes i.i.d.

tion (< 0) implies that portfolio VaR < sum of individual VaRs!
ual VaRs = portfolio VaR.
T1.1-IntroVaR: Adds autocorrelation between returns
Autocorrelation is a violation of the i.i.d. assumption

Parametric VaR
Standard Deviation (Volatility), Daily 1.0% 1.0% 1.0%
Confidence Level, c 95.0% 99.0% 99.0%
Significance Level, 1-c 5.0% 1.0% 1.0%
Target Horizon (days) 10 10 10
Autocorrelation 0.0 0.2 -0.2
1-day Value at Risk (VaR) 1.64% 1.64% 1.64%

Extended over Target Horizon (i.i.d)

Standard deviation (i.i.d) 3.16% 3.16% 3.16%
n-day VaR (i.i.d) 5.20% 5.20% 5.20%

Extended over Target Horizon (autocorrelated)

Scaling factor 10.00 14.38 6.94
Standard deviation (with autocorr.) 3.16% 3.79% 2.64%
VaR over horizon (with autocorr.) 5.20% 6.24% 4.33%

Notes:
1. Assumes a normal distribution, but does not need to be normal!
2. We have simplified by assuming mean return = 0
3. Autocorrelation is used to violate i.i.d.
T1.1-IntroVaR: Historical simulation

Volatility (simulation) 1.0% Historical Simulation (HS) VaR

VaR Confidence Level, c 95.0% Count (window), n= 20
Significance Level, 1-c 5.0% Worst loss Err:502
Returns 2nd Worst loss -2.519%
Period Raw Sorted
t-1 -0.20% -2.52% 1-day HS VaR, Excel %ile -0.790% =PERCENTILE(window, 5.0
t-2 0.08% -0.70% Dowd's VaR -0.699% =SMALL(window, 5.0%*20
t-3 1.74% -0.51% L. Allens VaR Err:502 Err:502
t-4 0.38% -0.20%
t-5 2.56% 0.08%
t-6 0.22% 0.20% Simulated P/L over last 20 trading days
t-7 0.68% 0.22% 4.00%
t-8 0.79% 0.38%
t-9 1.42% 0.54% 3.00%
t - 10 0.20% 0.64% 2.00%
t - 11 -0.70% 0.68%
t - 12 0.64% 0.74% 1.00%
t - 13 -2.52% 0.79%
t - 14 3.47% 0.89% 0.00%
t - 15 -0.51% 1.38%
-1.00%
t - 16 0.54% 1.42%
t - 17 1.96% 1.74% -2.00%
t - 18 0.89% 1.96%
t - 19 0.74% 2.56% -3.00%
t - 20 1.38% 3.47% t - 0 t - 2 t - 4 t - 6 t - 8 t - 10 t - 12 t - 14 t - 16 t - 18 t
PERCENTILE(window, 5.0%)
SMALL(window, 5.0%*20+1)

0 trading days

t - 12 t - 14 t - 16 t - 18 t - 20
T1.1.A. WACC and Certainty-equivalent cash flows

Weighted average cost of capital (WACC) Risk-free Rate

Rf Risk-free rate (US T-bond) 3.50% Cost of Capital (WACC)
beta Beta (theme park business) 0.7829
Mature market risk premium 6.00% Risk-adjusted
Brazil premium 3.95% Expected
ERP Risk Premium 9.95% Year Cash Flow
CoE Cost of Equity, CoE=Rf + beta*ERP 11.29% 0 ($2,000)
1 ($1,000)
Risk-free rate 3.50% 2 ($860)
Default spread 2.50% 3 ($270)
CoD(pt) Cost of debt, pre-tax 6.00% 4 $332
(t) Marginal tax rate 38.0% 5 $453
CoD(at) Cost of debt, after-tax 3.72% 6 $502
CoD(at)=CoD(pt)*(1-t) 7 $538
8 $596
D(%) Capital structure, debt 35.32% 9 $660
E(%) Capital structure, equity 64.68% 10 $692
10 (T) $10,669
WACC Cost of capital 8.616% NPV
WACC = E(%)*CoE + D(%)*CoD(at)
 3.500%
Capital (WACC) 8.616%

Risk-adjusted Certainty-Equivalent
Present Certain Cash Present
Value (PV) Flows, CE(CF) Value (PV)
($2,000) ($2,000) ($2,000) -$2,000= -$2,000 * (1+3.50%)^0 / (1+8.62%)^0
($921) ($953) ($921) -$953= -$1,000 * (1+3.50%)^1 / (1+8.62%)^1
($729) ($781) ($729) -$781= -$860 * (1+3.50%)^2 / (1+8.62%)^2
($211) ($234) ($211) -$234= -$270 * (1+3.50%)^3 / (1+8.62%)^3
$239 $274 $239 $274= $332 * (1+3.50%)^4 / (1+8.62%)^4
$300 $356 $300 $356= $453 * (1+3.50%)^5 / (1+8.62%)^5
$306 $376 $306 $376= $502 * (1+3.50%)^6 / (1+8.62%)^6
$302 $384 $302 $384= $538 * (1+3.50%)^7 / (1+8.62%)^7
$308 $405 $308 $405= $596 * (1+3.50%)^8 / (1+8.62%)^8
$314 $428 $314 $428= $660 * (1+3.50%)^9 / (1+8.62%)^9
$303 $427 $303 $427= $692 * (1+3.50%)^10 / (1+8.62%)^10
$4,669 $6,585 $4,669 $6,585= $10,669 * (1+3.50%)^10 / (1+8.62%)^10
$2,878 NPV $2,878
T1.1.A. WACC and Certainty-equivalent cash flows-version 2

Weighted average cost of capital (WACC) Risk-free Rate

Rf Risk-free rate (US T-bond) 2.00% Cost of Capital (WACC)
beta Beta (theme park business) 1.20
Mature market risk premium Risk-adjusted
Brazil premium Expected
ERP Risk Premium 9.00% Year Cash Flow
CoE Cost of Equity, CoE=Rf + beta*ERP 12.80% 0 ($100)
1 $50
Risk-free rate 2.00% 2 $70
Default spread 3.00% NPV
CoD(pt) Cost of debt, pre-tax 5.00%
(t) Marginal tax rate 40.0%
CoD(at) Cost of debt, after-tax 3.00%
CoD(at)=CoD(pt)*(1-t)

D(%) Capital structure, debt 30.00%

E(%) Capital structure, equity 70.00%

WACC Cost of capital 9.860%

WACC = E(%)*CoE + D(%)*CoD(at)
 2.000%
Capital (WACC) 9.860%

Risk-adjusted Certainty-Equivalent
Present Certain Cash Present
Value (PV) Flows, CE(CF) Value (PV)
($100) ($100) ($100) -$100= -$100 * (1+2.00%)^0 / (1+9.86%)^0
$46 $46 $46 $46= $50 * (1+2.00%)^1 / (1+9.86%)^1
$58 $60 $58 $60= $70 * (1+2.00%)^2 / (1+9.86%)^2
$3.51 NPV $3.51
https://www.bionicturtle.com/forum/threads/p1-t1-302-risk-adjusted-discount-rate.6680/

US Treasury bond 3.50% 1.00%

beta 0.7829 0.8
risk premium 9.950% 9.000%
COE 11.29% 8.20%

pre-tax cost of debt 6% 5%

marginal tax rate 38% 0%
default spread 2.50% 2.00%
after tax cost of debt 3.72% 3.00%

% debt debt 35.32% 40.00%

equity 64.68% 60.00%

cost of capital 8.616% 6.120%