You are a analysing portfolio which includes actively managed UK Equities against a FTSE 100 Index benchmark, US Corporate Bonds and UK Gilts. The UK Equity manager has consistently achieved +3% alpha, the US Corporate Bond and UK Gilt allocations are invested in ETF's which deliver performance in line with the benchmark. The portfolio is only allowed to include liquid assets. Your client is concerned about the impact of COVID on the UK Equity allocation and wishes to remove downside risk whilst retaining upside exposure. Standard deviation of Mean expected Allocation (Em) monthly returns annual return UK Equities 40 6% 24% US Corporate Bonds 20 4% 18% UK Gilts 40 3% 12% The correlation between UK Equities and US Corporate bonds is +0.5 The correlation between UK Equities and UK Gilts is + 0.75 The correlation between US Corporate bonds and UK Gilts is +0.3 a) The client has asked you to produce a risk report detailing the monthly VaR @ 95% for the portfolio. 1. Define parametric VaR @ 95% (4 marks) ii. Using the above parameters, calculate the expected monthly return on the portfolio, the standard deviation of the portfolio and hence parametric VaR @ 95% for the portfolio. (16 marks) b) Define and explain two different hedging strategies which could be overlaid on the portfolio to remove the downside risk from the UK equity market allocation but retain the +3% alpha. Sketch the pay off profiles (for the UK Equity allocation) for each strategy. Explain how each strategy removes downside risk and give one pro and one con for each strategy. (13.3 marks) Word limit: 200