The Volatility of Individual Securities in Measuring Value at Risk of a Portfolio

Abstract

Nowadays, investing in a portfolio of stocks or securities has been one of the most efficient ways for investors to increase wealth. Risk and return of each security are two main criteria to be considered in constructing an optimal portfolio. Previously, market risk is being measured using the standard deviation of changes in prices of the stock is referred to as price volatility. However, the majority of investors fail to relate it with the return of investment. Thus, the Value at Risk (VaR) concept has been successfully introduced to summarise the market risk of a portfolio as one number, for example in Ringgit Malaysia (RM). In this study, there are three main approaches consist of Delta Normal, Historical Simulation and Monte Carlo Simulation to measure monthly VaR for a portfolio of stocks from Sime Darby Sdn Bhd. at 95 and 99% confidence level. Empirical results show that VaR at 99% confidence level is higher than 95%. The findings also indicated that property stocks have the highest volatility and can be considered as the riskiest among the securities observed. Finally, risk managers and investors would be in a position to select a better stock portfolio with a known risk measure by employing the concept of VaR.