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.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter3: Risk And Return: Part Ii
Section: Chapter Questions
Problem 3P: Two-Asset Portfolio
Stock A has an expected return of 12% and a standard deviation of 40%. Stock B...
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