2. Probability Distribution: In finance, the acronym VaR stands for "value at risk". J. P. Morgan introduced value at risk in the 1980s as a way to answer a common question asked by investors: "How much might I lose?" For example, a 5%-VaR works by using a probability model to rule out the 5% worst things that might happen over a specified time horizon, such as the next year. For example, if a portfolio of stocks has an annual 5%-VaR of $0.6 million, there is a 5% probability that the value of the portfolio will drop by more than $0.6 million over the next year. Any probability model can be used to computeVaR. Imagine that you manage the $10 million portfolio of a wealthy investor. The portfolio is expected to average 10% return over the next year with standard deviation 20%. Assume the annual return of the portfolio follows a normaldistribution. a) What it the annual 5%-VaR for thisportfolio? b) You will receive a bonus of $50,000 if the return of the portfolio in the next year exceeds 15%. What is the probability that you will receive thebonus?
2. Probability Distribution: In finance, the acronym VaR stands for "value at risk". J. P. Morgan introduced value at risk in the 1980s as a way to answer a common question asked by investors: "How much might I lose?" For example, a 5%-VaR works by using a probability model to rule out the 5% worst things that might happen over a specified time horizon, such as the next year. For example, if a portfolio of stocks has an annual 5%-VaR of $0.6 million, there is a 5% probability that the value of the portfolio will drop by more than $0.6 million over the next year. Any probability model can be used to computeVaR. Imagine that you manage the $10 million portfolio of a wealthy investor. The portfolio is expected to average 10% return over the next year with standard deviation 20%. Assume the annual return of the portfolio follows a normaldistribution. a) What it the annual 5%-VaR for thisportfolio? b) You will receive a bonus of $50,000 if the return of the portfolio in the next year exceeds 15%. What is the probability that you will receive thebonus?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:2. Probability Distribution: In finance, the acronym VaR stands for "value at risk". J. P.
Morgan introduced value at risk in the 1980s as a way to answer a common question
asked by investors: "How much might I lose?" For example, a 5%-VaR works by using a
probability model to rule out the 5% worst things that might happen over a specified time
horizon, such as the next year. For example, if a portfolio of stocks has an annual 5%-VaR
of $0.6 million, there is a 5% probability that the value of the portfolio will drop by more
than $0.6 million over the next year. Any probability model can be used to computeVaR.
Imagine that you manage the $10 million portfolio of a wealthy investor. The portfolio is
expected to average 10% return over the next year with standard deviation 20%. Assume
the annual return of the portfolio follows a normaldistribution.
a) What it the annual 5%-VaR for thisportfolio?
b) You will receive a bonus of $50,000 if the return of the portfolio in the next year
exceeds 15%. What is the probability that you will receive thebonus?
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