Measurement Of The Financial Risks And Its Efficient Frontier

Finance is the core of economy, and financial safety is directly related with economic safety. Financial risk is objective in modern finance activity. With the globalization of economy, integration of finance, intensification of competition, relaxation of restriction, and innovation of technology, management and measurement of the financial risks have become key abilities for financial institutions and industrial and commercial enterprises in competition and also make the major content in finance engineering and modern finance theories.In this paper, we discuss VaR and CVaR. VaR (Value-at-Risk) is one of the most popular tools used to estimate the exposure to market risks, and CVaR (Conditional Value-at-Risk) is considered to be a more reasonable and efficient measurement of financial risk than VaR. VaR and CVaR set their base on statistics, mathematical algorithms. In this paper, we will use quantitative analysis more than qualitative analysis.This paper mainly discusses the computation and the efficient frontier of VaR and CVaR, some interesting and practical results are obtained. Firstly, based on the CVaR introduced by Rockfeller and Uryasev (2000), this paper establishes portfolio selection model with transaction costs under the assumption of normality of risk securities, and gives the Mean-CVaR efficient frontier and optimal investment tactics . this paper provides the Mean—CVaR efficient frontier and optimal investment tactics of portfolio selected from Shanghai and Shenzhen stock markets using foregoing conclusion.Secondly, this paper studies market risk on relative value of risky asset. It gives new definitions of VaR and CVaR for relative value, and then it discusses their properties and provides analytical formulas under logarithmic normal distribution and mixture of logarithmic normal distribution, and also calculates VaR and CVaR of relative value for some stocks. Finally, we gives the expectation of the study trend.