A firm has a portfolio composed of stock A and B with normally distributed returns. Stock A has an annual expected retur
Posted: Tue Nov 16, 2021 7:47 am
A firm has a portfolio composed of stock A and B with normally
distributed returns. Stock A has an annual expected return of 15%
and annual volatility of 20%. The firm has a position of $100
million in stock A. Stock B has an annual expected return of 25%
and an annual volatility of 30% as well. The firm has a position of
$50 million in stock B. The correlation coefficient between the
returns of these two stocks is 0.3.
a.
Compute the 5% annual VAR for the portfolio. Interpret the
resulting VAR.
b.
What is the 5% daily VAR for the portfolio? Assume 365 days per
year.
c.
If the firm sells $10 million of stock A and buys $10 million of
stock B, by how much does the 5% annual VAR change?
distributed returns. Stock A has an annual expected return of 15%
and annual volatility of 20%. The firm has a position of $100
million in stock A. Stock B has an annual expected return of 25%
and an annual volatility of 30% as well. The firm has a position of
$50 million in stock B. The correlation coefficient between the
returns of these two stocks is 0.3.
a.
Compute the 5% annual VAR for the portfolio. Interpret the
resulting VAR.
b.
What is the 5% daily VAR for the portfolio? Assume 365 days per
year.
c.
If the firm sells $10 million of stock A and buys $10 million of
stock B, by how much does the 5% annual VAR change?