Abstract
The paper is an exploratory study to apply the method of historical simulation based on the concept of Value at Risk on hypothetical portfolios on Jakarta Islamic Index (JII). Value at Risk is a tool to measure a portfolio’s exposure to market risk. We construct four portfolios based on the frequencies of the companies in Jakarta Islamic Index on the period of 1 January 2008 to 2 August 2010. The portfolio A has 12 companies, Portfolio B has 9 companies, portfolio C has 6 companies and portfolio D has 4 companies. We put the initial investment equivalent to USD 100 and use the rate of 1 USD=Rp 9500. The result of historical simulation applied in the four portfolios shows significant increasing risk on the year 2008 compared to 2009 and 2010. The bigger number of the member in one portfolio also affects the VaR compared to smaller member. The level of confidence 99% also shows bigger loss compared to 95%. The historical simulation shows the simplest method to estimate the event of increasing risk in Jakarta Islamic Index during the Global Crisis 2008.
Highlights
Modern portfolio theory aims to allocate assets by maximising the expected risk premium per unit of risk
We develop a portfolio from Jakarta Islamic Index using Value at Risk method
Descriptive Statistic we will explain about the descriptive statistic on Jakarta Islamic Index in the sample periods of 2008-2010
Summary
Modern portfolio theory aims to allocate assets by maximising the expected risk premium per unit of risk. In a mean-variance framework, risk is defined in term of the possible variation of expected portfolio returns. The choice of mean-variance efficient portfolios is likely to give rise to an inefficient strategy for optimising expected returns for financial assets whilst minimising risk. VAR is an aggregate measure of risk, the largest probable loss a company will have in a certain period with given confidence level for example 99% or 95%. One of the main advantages of the VAR is that it works across different asset classes such as stocks and bonds. It is often used as an ex-post measure to evaluate the current exposure to market risk and the decision as to whether exposure should to be reduced (Kooli, 2004)
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