VaR [3]

Your current portfolio of equities has a market value of 100,000. Assume normally distributed returns.

1. Suppose the whole portfolio is invested in one stock. The stock has an annual expected return of 10% and an annual standard deviation of 25%.

Estimate Value at Risk for your portfolio on a daily horizon and a confidence level of 1%.

2. Suppose instead that the portfolio is invested with equal weights in two stocks, each with the same expected return and standard deviation 25%. If the correlation between the two shares is positive, but less than one, will the VaR of the portfolio be smaller or larger than the previous VaR? What if the correlation is negative?