2. You set up a portfolio II that consists of $y and one share of a...

 

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2. You set up a portfolio II that consists of $y and one share of a stock X to be held for a period of T = 3 years. The expected annual return on the stock is 10%, its annual volatility 30% and the stock price St is assumed to follow the asset price model of log-normal distribution. Compute the amount of cash y as a percentage of the initial stock price So (i.e. set y = pSo and compute p € (0, 1)) that is necessary so that the VaR at 95% confidence for the portfolio at expiry equals the initial stock price. [Recall: In this case, VaR is the value à such that P(II(T) < x) = 0.05.] 2. You set up a portfolio II that consists of $y and one share of a stock X to be held for a period of T = 3 years. The expected annual return on the stock is 10%, its annual volatility 30% and the stock price St is assumed to follow the asset price model of log-normal distribution. Compute the amount of cash y as a percentage of the initial stock price So (i.e. set y = pSo and compute p € (0, 1)) that is necessary so that the VaR at 95% confidence for the portfolio at expiry equals the initial stock price. [Recall: In this case, VaR is the value à such that P(II(T) < x) = 0.05.]

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ANS WER So the amount of cash y as a percentage of the initial stock price So that is necessary so t... View the full answer