Refer to Example 15–4. What is the DEAR of the portfolio if the returns on the three assets are independent of each other?

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EXAMPLE 15-4 Calculation of the DEAR of a Portfolio $ Table 15-3 shows a hypothetical correlation matrix between daily seven-year, zero- coupon bond yield changes, /$ spot exchange rate changes, and changes in daily returns on a U.S. stock market index (Wilshire 5000). From Table 15-3, the correlation between the seven-year, zero-coupon bonds and /$ exchange rates, Pze, is negative (-0.2), while U.S. stock return changes with, respectively, seven-year, zero-coupon yields, Pzus., (0.4) and /$ shocks, Pus.. (0.1) are positively correlated. Using this correlation matrix along with the individual asset DEARS, we can calculate the risk or standard deviation of the whole (three-asset) trading portfolio as:17 [[(DEAR2) + (DEAR)2 + (DEAR Us.) + (2x Pze X DEAR, X DEAR) DEAR portfolio = (5) + (2x Pz.U.S. X DEAR, X DEARU.S.) + (2x Pus..EX DEARU.S. DEAR)]