An investor has combined securities X, Y, and Z into a portfolio. He has invested $1000 in
Question:
An investor has combined securities X, Y, and Z into a portfolio. He has invested $1000 in Security X, $2000 into Security Y, and $3000 into Security Z. Security X has an expected return of 10%; Security Y has an expected return of 15%; and security Z has an expected return of 20%. The standard deviations associated with Securities X, Y, and Z are 12%, 18%, and 24%, respectively. The coefficient of correlation between returns on Securities X and Y is 0.8; the correlation coefficient between X and Z returns is 0.7; and the correlation coefficient between Y and Z returns is 0.6.
a. Find the expected return and standard deviation of the resultant portfolio.
b. Over the course of one week, what is the VaR of this 3-security portfolio at the 1% confidence level?
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