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Question 24. VAR Calculation (12 marks)
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. (5 marks)
b.
What is the 5% daily VAR for the portfolio? Assume 365 days per year. (2 marks)
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? (5 marks)

Top Answer

Part a) Stock A: $100 million E(R) A =15% A = 20% Stock A: $50 million E(R) A =25% A = 30% AB = 0.3 Portfolio value... View the full answer

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