A firm has a portfolio composed of stock A and B with normally distributed returns. Stock...
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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. b. C. Compute the 5% annual VAR for the portfolio. Interpret the resulting VAR. (5 marks) What is the 5% daily VAR for the portfolio? Assume 365 days per year. (2 marks) 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) 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. b. C. Compute the 5% annual VAR for the portfolio. Interpret the resulting VAR. (5 marks) What is the 5% daily VAR for the portfolio? Assume 365 days per year. (2 marks) 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)
Expert Answer:
Answer rating: 100% (QA)
To compute the 5 annual Value at Risk VaR for the portfolio we can follow these steps 1 Calculate the portfolios expected return The expected return o... View the full answer
Related Book For
Equity Asset Valuation
ISBN: 978-0470571439
2nd Edition
Authors: Jerald E. Pinto, Elaine Henry, Thomas R. Robinson, John D. Stowe, Abby Cohen
Posted Date:
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