Answered: A firm has a portfolio composed of…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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D&R A3

6-1

Question 6. VAR Calculation

A firm has a portfolio composed of stock A and B with normally distributed returns. Stock A has an annual expected return of 15% and annual volatility of 20%. The firm has a position of $100 million in stock A. Stock B has an annual expected return of 25% and an annual volatility of 30% as well. The firm has a position of $50 million in stock B. The correlation coefficient between the returns of these two stocks is 0.3.

What is the 5% daily VAR for the portfolio? Assume 365 days per year.

Features Features Normal distribution is characterized by two parameters, mean (µ) and standard deviation (σ). When graphed, the mean represents the center of the bell curve and the graph is perfectly symmetric about the center. The mean, median, and mode are all equal for a normal distribution. The standard deviation measures the data's spread from the center. The higher the standard deviation, the more the data is spread out and the flatter the bell curve looks. Variance is another commonly used measure of the spread of the distribution and is equal to the square of the standard deviation.

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