Question: Question 2: (20 marks) a) Consider a stock portfolio consisting of three stocks with normally distributed returns. Stock ABC has a market value of $1

Question 2: (20 marks) a) Consider a stock portfolio consisting of three stocks with normally distributed returns. Stock ABC has a market value of $1 million with a daily volatility of 1%. Stock DEF has a market value of $2 million with a daily volatility of 2% and Stock XYZ has a market value of $3 million with a daily volatility of 3%. Calculate the 99% confidence interval one-day VaR of the portfolio. Assume correlation coefficients among the 3 stocks are all 50% and the average daily expected returns are 15 marks zero. b) Bank ABC's reported daily VaR is $5 million (using 95% confidence level) and that of Bank XYZ is $6 million (using the 99% confidence level). Which bank has higher market risk and why? 5 marks

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Question 2. [20 marks] Consider the following plot of stock prices (left) and daily returns (right). We compare the empirical data (top) to one realisation of a lognormal model (bottom). Empirical...

Question 2 [20 marks] From the answer in question 1, argue which one of the primary activities could be the weakest link in the XT Beautys value chain primary activities. NOTE: You will get marks for...

8 marks If he thinks he can earn 7% annually, which should he choose? (3 marks) If he thinks he can earn 9% annually, which is the best choice? (3 marks) Explain how interest rates influence the...

12:45 7 BA 303 Final Take Examination Spri... Question 1: (12.5 marks) It is now May 16, 2020. "Ace Engineering" of Oakland California has just developed a solar panel capable of generating 200% more...

References Mailings Review View Help Tell me what you want to do - Aa- A 21 AaBbCcDd. AaBbCcI AaBbCel Aa Emphasis 1 Heading 1 1 Heading 2 TH - A aby-A- Paragraph Styles Question 1: (12.5 marks) It is...

Question 1 [25 Marks] Melusi's utility function is stated as follows: U(W) = a + b [n +$]1_y Where a, b, n and \"y are constants and W is wealth. Use the above information to answer the following...

You helped me a couple of weeks ago. I was wondering if i could setup a time for tomorrow that you could be available to help me with some questions. I will pay $20 per question. They are short and I...

Detailed Explanation for Question 32 to 36 For question 32, how to get contract multiplier of 500? For question 36, why the change in the portfolio yield is 0.01%, and how to get $82.8? 21 Student:...

my question is why question 34's solution shows that a contract multiplier is $500? for questions 35 is why the change in yields is 0.01%. for question 36, how to get 82.8? why the change in yield is...

A four-stroke, single cylinder petrol engine mounted on a motor cycle was put to load test. The load measured on dynamometer was 30 kg with drum diameter and speed, respectively, at 900 mm and 2000...

Carmaker produces small cars in a perfectly competitive market using labour (L) and capital (K). Carmaker's production function is given by f(L,K) = min (0.05L, K/2}, where Q is the number of cars...

The Bankruptcy Act of 1 9 7 8 made personal bankruptcy difficult. was later declared unconstitutional by the U . S . Supreme Court. prevents dishonest people from declaring bankruptcy. made personal...

A company is preparing completing their Cash Budget. The following data has been prepared for cash receipts and payments. January February March Cash receipts $1,061,200 $1,182,400 $1,091,700 Cash...