Consider a portfolio that is comprised of two stocks A and B. The position in stock A is valued at £70,000 and has daily standard deviation of returns of 1%. The stock B position is valued at £250,000 and has daily standard deviation of returns of 2.5%. Returns in stock A and B are normally distributed and have correlation -0.6. Calculate the 10-day 95% VaR of stock A Calculate the 10-day 95% ES of stock A Calculate the 10-day 95% VaR of the portfolio. By how much does diversification reduce the VaR
Consider a portfolio that is comprised of two stocks A and B. The position in stock A is valued at £70,000 and has daily standard deviation of returns of 1%. The stock B position is valued at £250,000 and has daily standard deviation of returns of 2.5%. Returns in stock A and B are normally distributed and have correlation -0.6. Calculate the 10-day 95% VaR of stock A Calculate the 10-day 95% ES of stock A Calculate the 10-day 95% VaR of the portfolio. By how much does diversification reduce the VaR
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
- Consider a portfolio that is comprised of two stocks A and B. The position in stock A is valued at £70,000 and has daily standard deviation of returns of 1%. The stock B position is valued at £250,000 and has daily standard deviation of returns of 2.5%. Returns in stock A and B are
normally distributed and have correlation -0.6.
- Calculate the 10-day 95% VaR of stock A
- Calculate the 10-day 95% ES of stock A
- Calculate the 10-day 95% VaR of the portfolio. By how much does diversification reduce the VaR
- Calculate the marginal VaR of each position
- Use your answers to c) and d) and estimate what will be the effect on the portfolio’s VaR if you increase the position on stock A by 10%. What do you observe?
Transcribed Image Text:APPENDIX
Confidence
95%
97.5%
99%
VAR
1.645
1.960
2.326
MaxVAR
1.960
2.241
2.576
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