(a) Find the VaR for an investment of $500,000 at 1%. (That is, find out how low the value of this investment could be if we rule out the worst 1% of outcomes.) The investment is expected to grow during the year by 10% with SD 35%. Assume a normal model for the change in value.
(b) How much smaller would the annual SD of the investment need to become in order to reduce the VaR to $200,000? Assume that the expected growth remains 10%.
(c) If this performance is expected to continue for two years, what is the VaR 1at 1%2 if the investment is held for two years rather than one? Use the features of the investment in part (a).