Question 2.4 The expected rate of return of A stock is 30% and the standard deviation...

 

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Question 2.4 The expected rate of return of A stock is 30% and the standard deviation of the returns is 22%, while the expected rate of return of B stock is 18% and the standard deviation of the returns is 15%. The correlation between the returns of A and B shares is 0.40 and the risk-free rate of return of T-bills is 3%. The FTSE100 index has a rate of return of 15% during the same period.< Part A). Calculate the expected return and standard deviation of an equally-weighted portfolio containing stocks A and B. (5 marks)< Part B). A risk manager assumes that the joint distribution of returns is multivariate normal and calculates the following risk measures for a two-asset portfolio:< Asset Position Individual VaR Marginal VaR £100< -23.34 -0.176¹ £100<¹ -46.6¹ -0.44 £200<¹ -61.6 A B Portfolio 2 Component VaR -£17.6< -£44< -£61.6 Part C). What are PA and BB relative to the portfolio?< ( If asset B is dropped from the portfolio, what is the reduction in portfolio Value at Risk (VaR)?< (5 marks)< (5 marks)< Part D). A small investment management firm measures absolute risk with a 99%, one-year VaR, which gives -£1.5 million. The firm wants to allocate this risk to two portfolio managers, each with the same VaR budget. Given that the correlation between managers is -0.7, the VaR budget for each should be? Question 2.4 The expected rate of return of A stock is 30% and the standard deviation of the returns is 22%, while the expected rate of return of B stock is 18% and the standard deviation of the returns is 15%. The correlation between the returns of A and B shares is 0.40 and the risk-free rate of return of T-bills is 3%. The FTSE100 index has a rate of return of 15% during the same period.< Part A). Calculate the expected return and standard deviation of an equally-weighted portfolio containing stocks A and B. (5 marks)< Part B). A risk manager assumes that the joint distribution of returns is multivariate normal and calculates the following risk measures for a two-asset portfolio:< Asset Position Individual VaR Marginal VaR £100< -23.34 -0.176¹ £100<¹ -46.6¹ -0.44 £200<¹ -61.6 A B Portfolio 2 Component VaR -£17.6< -£44< -£61.6 Part C). What are PA and BB relative to the portfolio?< ( If asset B is dropped from the portfolio, what is the reduction in portfolio Value at Risk (VaR)?< (5 marks)< (5 marks)< Part D). A small investment management firm measures absolute risk with a 99%, one-year VaR, which gives -£1.5 million. The firm wants to allocate this risk to two portfolio managers, each with the same VaR budget. Given that the correlation between managers is -0.7, the VaR budget for each should be?

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Answer Part A Here is a certain predefined set of procedure to calculate the expected return formula ... View the full answer