How to study a user portfolio for risk exposure- case study-2

Here are the index-wise observations based on the visualizations provided:

1. Index: ^GSPC (S&P 500)

• VaR (Value at Risk):
  • The VaR for ^GSPC is significantly negative, indicated by a deep red color in the heatmap. This suggests that the portfolio is highly exposed to potential losses due to movements in the S&P 500.
  • In the line chart, the VaR value drops sharply, confirming the high potential for loss associated with this index.
• Sensitivity:
  • The sensitivity metric for ^GSPC shows a moderate negative impact (dark green color in the heatmap). This indicates that the portfolio is sensitive to changes in the S&P 500, though not as severely as it is to VaR.
  • The sensitivity line is relatively flat and stable in the line chart, implying consistent exposure.
• Stress Test Result:
  • The stress test result for ^GSPC is moderately negative, indicating that the portfolio could experience notable losses under adverse market conditions related to this index.
  • The heatmap shows this with a green color, and the line chart reflects a stable but significant impact.
• Regression Contributions:
  • The regression contributions for ^GSPC are moderate, suggesting that changes in this index explain a reasonable amount of the portfolio’s returns.
  • The consistent green color in the heatmap indicates this impact, which is flat in the line chart.
• PCA Contributions:
  • The PCA contributions for ^GSPC are minimal, indicating that this index does not significantly drive the portfolio’s overall variance when considering principal components.
  • This is shown by a flat line in the line chart and a consistent green color in the heatmap.
• Variance Contributions:
  • The variance contributions from ^GSPC are moderate, indicating that this index contributes to the overall variance in the portfolio, but not excessively.
  • The impact is consistent across all risk factors, as seen in the heatmap and the flat line in the line chart.

2. Index: ^IXIC (NASDAQ)

• VaR (Value at Risk):
  • Similar to ^GSPC, the VaR for ^IXIC is significantly negative, shown by the deep red color in the heatmap and a sharp drop in the line chart. This suggests high exposure to potential losses from movements in the NASDAQ index.
• Sensitivity:
  • The sensitivity metric for ^IXIC shows a moderate impact, similar to ^GSPC, indicated by the dark green color in the heatmap. The line chart confirms this with a stable, moderate level of sensitivity.
• Stress Test Result:
  • The stress test result for ^IXIC indicates that the portfolio could experience moderate losses under stress scenarios related to the NASDAQ index.
  • The green color in the heatmap and the consistent line in the chart confirm this.
• Regression Contributions:
  • The regression contributions for ^IXIC are moderate, suggesting that changes in the NASDAQ index explain some of the portfolio’s returns.
  • This is reflected in the green color in the heatmap and the flat line in the line chart.
• PCA Contributions:
  • The PCA contributions for ^IXIC are minimal, indicating that this index does not significantly contribute to the overall variance in the portfolio based on principal components.
  • This is shown by the flat line in the line chart and consistent green color in the heatmap.
• Variance Contributions:
  • The variance contributions from ^IXIC are moderate, indicating that this index contributes to the overall portfolio variance but not excessively.
  • The impact is consistent with the other indices, as seen in the heatmap and line chart.

3. Index: ^DJI (Dow Jones Industrial Average)

• VaR (Value at Risk):
  • The VaR for ^DJI is also significantly negative, indicating a high potential for losses due to movements in the Dow Jones Industrial Average. The heatmap shows a deep red color, and the line chart confirms the sharp drop in VaR.
• Sensitivity:
  • The sensitivity metric for ^DJI shows a moderate negative impact, similar to ^GSPC and ^IXIC. This is indicated by the dark green color in the heatmap and the stable line in the chart.
• Stress Test Result:
  • The stress test result for ^DJI indicates moderate losses under stress conditions related to this index.
  • The green color in the heatmap and the consistent line in the line chart reflect this impact.
• Regression Contributions:
  • The regression contributions for ^DJI are moderate, suggesting that changes in this index explain a portion of the portfolio’s returns.
  • This is indicated by the green color in the heatmap and the flat line in the line chart.
• PCA Contributions:
  • The PCA contributions for ^DJI are minimal, indicating that this index does not significantly drive the portfolio’s overall variance when considering principal components.
  • The impact is reflected in the flat line in the line chart and the consistent green color in the heatmap.
• Variance Contributions:
  • The variance contributions from ^DJI are moderate, indicating that this index contributes to the overall variance in the portfolio but not excessively.
  • The heatmap and line chart both show a consistent impact similar to the other indices.

Summary of Index-Wise Impact:

• VaR is the Most Critical Metric Across All Indices:
  • All three indices (^GSPC, ^IXIC, and ^DJI) show significant negative VaR, suggesting that these are the primary drivers of potential losses in the portfolio. This warrants particular attention and risk mitigation strategies.
• Consistency in Sensitivity and Stress Test Results:
  • The portfolio’s sensitivity and stress test results are consistent across all three indices, showing moderate impact. This suggests a balanced exposure across these indices, but also highlights the need to maintain this balance through regular monitoring.
• Minimal Impact from PCA Contributions:
  • PCA contributions are minimal across all indices, indicating that these factors do not significantly affect the portfolio’s overall variance when considering principal components.
• Moderate Variance and Regression Contributions:
  • Variance and regression contributions are moderate and consistent across all indices, indicating that each index plays a role in explaining the portfolio’s returns and variance, but none is overly dominant.