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)