For revision purpose only Advanced Financial Management a) You are given the following information about a portfolio that has two equally weighted stocks, P and Q (i) The economy over the next year could be good or bad with equal probability (ii) The returns of the stocks can vary as shown in the table below Stock Return when economy is good Return when economy is bad P 10 2 Q 18 5 b) A firm's portfolio is currently valued at 50 million The portfolio has an annualized expected rate of return of 7 and a volatility of 10 5 Assume the returns are normally distributed, and that the portfolio pays no dividends Calculate the 5 annual Value at Risk (VaR) for the firm's portfolio investment gain after one year

Question: For revision purpose only - Advanced Financial Management a). You are given the following information about a portfolio that has two equally-weighted stocks, P and

For revision purpose only - Advanced Financial Management

a). You are given the following information about a portfolio that has two equally-weighted stocks, P and Q.

(i) The economy over the next year could be good or bad with equal probability.

(ii) The returns of the stocks can vary as shown in the table below:

Stock	Return when economy is good	Return when economy is bad
P	10%	-2%
Q	18%	-5%

b) A firm's portfolio is currently valued at 50 million. The portfolio has an annualized expected rate of return of 7% and a volatility of 10.5%. Assume the returns are normally distributed, and that the portfolio pays no dividends.

Calculate the 5% annual Value-at-Risk (VaR) for the firm's portfolio investment gain after one year.

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