Question: An analyst would like to know the VaR for a portfolio consisting of two asset classes: long-term government bonds issued in the United States and

  1. An analyst would like to know the VaR for a portfolio consisting of two asset classes: long-term government bonds issued in the United States and long-term government bonds issued in the United Kingdom. The expected monthly return on US bonds is 0.85 per cent, and the standard deviation is 3.20 per cent. The expected monthly return on UK bonds, in US dollars, is 0.95 per cent, and the standard deviation is 5.26 per cent. The correlation between the US dollar returns of UK and US bonds is 0.35. The portfolio market value is $100 million and is equally weighted between the two asset classes.
    1. Calculate the 95 per cent monthly VaR (Value at Risk of the Portfolio).
    2. Calculate the 99 per cent weekly VaR of the portfolio.
    3. Suggest another metric (other than VaR) that is proposed to be used by the regulators in order to measure risk. Explain briefly what the differences are between this measure and VaR.

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