QUESTION B1 An investor is holding a portfolio which comprises £4 million of Bond A and £6 million of Bond B. Bond A has a daily volatility of 0.1%, and Bond B's daily volatility is 0.3%. The correlation coefficient between A and B is 0.1. Required: a) Calculate the value at risk (VaR) of Bond A and Bond B separately and of the combined portfolio over 7 days at 99% confidence level. b) Using the VaR as calculated in (a) to highlight the benefit of diversification.
QUESTION B1 An investor is holding a portfolio which comprises £4 million of Bond A and £6 million of Bond B. Bond A has a daily volatility of 0.1%, and Bond B's daily volatility is 0.3%. The correlation coefficient between A and B is 0.1. Required: a) Calculate the value at risk (VaR) of Bond A and Bond B separately and of the combined portfolio over 7 days at 99% confidence level. b) Using the VaR as calculated in (a) to highlight the benefit of diversification.
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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Transcribed Image Text:QUESTION B1
An investor is holding a portfolio which comprises £4 million of Bond A and £6
million of Bond B. Bond A has a daily volatility of 0.1%, and Bond B's daily
volatility is 0.3%. The correlation coefficient between A and B is 0.1.
Required:
a) Calculate the value at risk (VaR) of Bond A and Bond B separately and of
the combined portfolio over 7 days at 99% confidence level.
b) Using the VaR as calculated in (a) to highlight the benefit of diversification.
c) Critically discussion the key drawbacks of using VaR in risk management.
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