A portfolio manager has positions that include a £100,000 investment in A Corp and a £75,000 investment is B Corp. The position in A Corp has standard deviation of gains and losses of 35% per annum whilst the position in B Corp has standard deviation of gains and losses of 22% per annum. Gains and losses for both A Corp and B Corp are normally distributed while the returns A Corp and B Corp have correlation -0.6 (minus 0.6). When necessary, assume 252 trading days in the calendar year. Based on the above and the table in the Appendix: Calculate the 1-month 99% VaR and ES of the portfolio Calculate the 1-month 99% marginal VaR of each position. Interpret your answer Can the portfolio manager increase the position of A Corp to reduce their market risk exposure? Justify your answer
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.
A
- Calculate the 1-month 99% VaR and ES of the portfolio
- Calculate the 1-month 99% marginal VaR of each position. Interpret your answer
- Can the portfolio manager increase the position of A Corp to reduce their market risk exposure? Justify your answer
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