KIC000043 - I I Microsoft Example • If the standard...

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Unformatted text preview: I I Microsoft Example • If the standard deviation of the change in portfolio value is .02 for one day, then the standard deviation over 10 days is .02x./lO • Assume the change in the value of the portfolio is normally distributed. Then N(-2.33)=O.01 and the 99% lO-day VaR is VaR=zoW = 2.33x (02x./lO)x 10,000,000 = 2.33x632,456=\SI,473,621I Portfolio of Microsoft and AT&T • Now consider a portfolio consisting of$lOM in Microsoft and$5MinAT&T ~ • Suppose that the correlation between the returns is 0.3 • What is the VaR of the portfolio? • Can we just add the two individual VaRs? Why not? J I VaR of Portfolio • The 10-day 99% VaR for the portfolio is VaR = 2.33x.01473x.J1i) xI5,OOO,OOO=~1,627,9831 • If we had simply added the individual VaRs, we would have gotten 1,473,621 + 368,405 = $1,842,026. • • Therefore, we see that the benefits ofd\~~\~\ tOhQ l/\ are 1,842,026-1,627,983 = $214,043 ~ I AT&T Example • Consider a position of$5 million in AT&T • The daily volatility of AT&T is 1% (approx 16% per year) • The standard deviation per 10 days is...
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This note was uploaded on 09/07/2011 for the course FINANCE 320 taught by Professor Sapp during the Fall '10 term at Iowa State.

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KIC000043 - I I Microsoft Example • If the standard...

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