A bank has estimated its VAR for its bond portfolio is $25,600 and for its stock portfolio, it is $33,600. The correlation coefficient between the two portfolios is -0.25. How much VAR would be reduced if they were allowed to aggregate the VAR of the two portfolios? $36,800.00 $59,200.00 $10,400.00 $22,400.00
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
QUESTION 5
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A bank has estimated its VAR for its bond portfolio is $25,600 and for its stock portfolio, it is $33,600. The correlation coefficient between the two portfolios is -0.25. How much VAR would be reduced if they were allowed to aggregate the VAR of the two portfolios?
$36,800.00
$59,200.00
$10,400.00
$22,400.00
An aggregate portfolio is a combination of two or more individual portfolios into a single portfolio. Aggregation is often used in finance and investment management to analyze the combined risk and return of a group of assets or portfolios.
When portfolios are combined or aggregated, the risk and return characteristics of the individual portfolios can be analyzed in relation to the overall risk and return of the combined portfolio. This can help investors and portfolio managers make better-informed decisions about how to allocate their investments and manage their risk exposure.
Portfolio aggregation can be done in various ways, including using statistical methods to estimate the correlation and covariance between the individual portfolios, or by simply combining the individual portfolios into a single portfolio and analyzing the overall risk and return characteristics. Aggregating portfolios can help to diversify risk and create a more efficient portfolio by combining assets with different levels of risk and return.
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