Chapter 27: Enterprise Risk Management
27.9 (Spreadsheet Provided)
Assume that in Business Snapshot 27.1, the change in the three-month Euribor rate in each
quarter, is normally distributed with mean zero and a standard deviation equal to x basis points.
Use Monte Carlo simulation (500 trials) to calculate a probability distribution for the average
interest rate paid by MdP over the 14-year period for values of x equal 10, 20, and 50.
The spreadsheet contains two tables. One shows Euribor each quarter; the other shows the rate
paid each quarter. The Monte Carlo simulation results show that when x is 10 basis points
(corresponding to an SD=0.1 for the percentage rate change) there is a probability of about 30%
The historical average standard deviation of the change in rates per quarter is about 0.5%
27.10.
A fund’s risk appetite is such that it wants to be 97.5% certain it will not lose more than 25% in
any one year. Using the performance of the S&P 500 between 1994 and 2003 (see Table 27.2)
determine the beta the fund should have. Assume a risk-free rate of 2.5% per annum.