A UK investor buys $1 million of UK stocks in a portfolio with beta 1.2 with respect to the UK market index, and $2 million of US stocks in a portfolio with beta 0.8 w.r.t. with respect to the US market index. Suppose the FTSE 100, S&P 500 and £/$ volatilities are 15%, 10% and 35% respectively, and their correlations are: %UK−US = 0.7, %UK−£/$= 0.4 and %US−£/$= 0.5. Calculate the VaR due to each market risk factor and then aggregate this into (a) the equity VaR and (b) the total systematic VaR. For each VaR figure apply the normal linear model and use 99% confidence (i.e. α = 1%) and h = 10 days for the risk horizon. Express all your answers in $.
A UK investor buys $1 million of UK stocks in a portfolio with beta 1.2 with respect to the UK market index, and $2 million of US stocks in a portfolio with beta 0.8 w.r.t. with respect to the US market index. Suppose the FTSE 100, S&P 500 and £/$ volatilities are 15%, 10% and 35% respectively, and their correlations are: %UK−US = 0.7, %UK−£/$= 0.4 and %US−£/$= 0.5. Calculate the VaR due to each market risk factor and then aggregate this into (a) the equity VaR and (b) the total systematic VaR. For each VaR figure apply the normal linear model and use 99% confidence (i.e. α = 1%) and h = 10 days for the risk horizon. Express all your answers in $.
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
Problem 1PS
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A UK investor buys $1 million of UK stocks in a portfolio with beta 1.2 with respect
to the UK market index, and $2 million of US stocks in a portfolio with beta 0.8
w.r.t. with respect to the US market index.
Suppose the FTSE 100, S&P 500 and £/$ volatilities are 15%, 10% and 35%
respectively, and their correlations are:
%UK−US = 0.7, %UK−£/$= 0.4 and %US−£/$= 0.5.
Calculate the VaR due to each market risk factor and then aggregate this into (a)
the equity VaR and (b) the total systematic VaR.
For each VaR figure apply the normal linear model and use 99% confidence (i.e.
α = 1%) and h = 10 days for the risk horizon. Express all your answers in $.
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