Question: Value-At-Risk and Expected Short Fall (14 marks) Consider stocks A and B whose annualised rate of return having the following characteristics: a) Stock A

Value-At-Risk and Expected Short Fall (14 marks) Consider stocks A and B

Value-At-Risk and Expected Short Fall (14 marks) Consider stocks A and B whose annualised rate of return having the following characteristics: a) Stock A B i) ii) Rate of Return 12% 18% Standard Deviation 24% 30% Coefficient of correlation (p) between the two stocks is 0.3. What is the daily 99% VaR of a portfolio consist of $5 million of Stock A and $10 million of Stock B? Given the 99% normal percentile is 2.3263. (3 marks) What assumption have you made in the calculation of (i)? (2 marks) b) The following shows the historical return series of Stock C. Day Daily Return of Stock C Day Daily Return of Stock C 1 12.0% 16 9.0% 2 12.0% 17 16.0% 3 -8.0% 18 -1.0% 4 -2.0% 19 7.0% 5 2.0% 20 19.0% 6 4.0% 21 4.0% 7 -2.0% 22 14.0% 8 5.0% 23 11.0% 9 9.0% 24 6.0% 10 28.0% 25 11.0% 11 -50.0% 26 -1.0% 12 10.0% 27 -2.0% 13 6.0% 28 2.0% 14 4.5% 29 6.5% 15 1.0% 30 3.2% i) ii) What is the procedure to find 90% daily Value-at-Risk (VaR) of stock C using historical simulation? (3 marks) What is the 90% daily value-at-Risk of an $1 million investment in stock C? (1 mark)

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