Interconnected Risk Exercise — Assess contagion risk in an investment portfolio

Please read the following and see attachment for the excel

Description: You are the same risk analyst in a wealth management company who helped one of the wealth managers win the account of the Vanderbilt Family Office. Your liquidity analysis of the FO’s existing and proposed investment portfolios was favorably received and the proposed portfolio changes were made.

Now the FO’s Administrative Manager has asked you to stress test the new portfolio in a Global Markets Correction scenario, highlighting the positions which are vulnerable to contagion between more than one risk category.

Instruction: Study the price changes of the investments listed in Attachment A between 31 March 2019 and the 30 June 2019 stress test. Based on your knowledge of each type of investment’s market, credit and liquidity risk characteristics, enter your rationale for the existence and magnitude, or non-existence, of contagion risk against each position in the shaded Contagion Risk Assessment column. Then, answer the following questions, giving brief reasons for each of your answers.

1.Which fixed income position(s) show the most contagion risk in the stress test?

2.Which equity position(s) show the most contagion risk in the stress test?

3.Which alternative investment* position(s) show the most contagion risk in the stress test?

(* = Commercial Real Estate and Hedge Funds)