Question: Question 11: a) (Value at risk) Consider a portfolio A of loans worth 10 million. Assume that the yearly (252 trading days) volatility is 32%.

Question 11: a) (Value at risk) Consider a portfolio A of

Question 11: a) (Value at risk) Consider a portfolio A of loans worth 10 million. Assume that the yearly (252 trading days) volatility is 32%. Assume successive days' returns are independent and normally distributed. Required: Compute the Value at Risk (VaR) for this portfolio for a time horizon of 10 trading days at a 99% confidence level. (3 marks) Consider a portfolio B of fixed-income securities worth 10 million. Assume that the yearly (252 trading days) volatility is 16%. Compute the Value at Risk (VaR) for this portfolio for a time horizon of 10 trading days at a 99% confidence level. (3 marks) Combine the two portfolios in a new portfolio C with exposures given by weight WA = 0.5 and WB = 0.5, respectively. Notice that the total value of the portfolio now is still 10 million. Compute the Value at Risk of this new portfolio at a 99% confidence interval. The two assets have a correlation coefficient of p = -0.2. (8 marks) How do the individual VaRs compare with respect to the VaR of the new portfolio? Explain the economic intuition behind the result. (6 marks) Total for a): 20 marks Question 11: a) (Value at risk) Consider a portfolio A of loans worth 10 million. Assume that the yearly (252 trading days) volatility is 32%. Assume successive days' returns are independent and normally distributed. Required: Compute the Value at Risk (VaR) for this portfolio for a time horizon of 10 trading days at a 99% confidence level. (3 marks) Consider a portfolio B of fixed-income securities worth 10 million. Assume that the yearly (252 trading days) volatility is 16%. Compute the Value at Risk (VaR) for this portfolio for a time horizon of 10 trading days at a 99% confidence level. (3 marks) Combine the two portfolios in a new portfolio C with exposures given by weight WA = 0.5 and WB = 0.5, respectively. Notice that the total value of the portfolio now is still 10 million. Compute the Value at Risk of this new portfolio at a 99% confidence interval. The two assets have a correlation coefficient of p = -0.2. (8 marks) How do the individual VaRs compare with respect to the VaR of the new portfolio? Explain the economic intuition behind the result. (6 marks) Total for a): 20 marks

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