Question
2. [2 points] Assume portfolio X has a VaR of $500,000. The portfolio is made up of four assets: Asset A, Asset B, Asset C,
2. [2 points] Assume portfolio X has a VaR of $500,000. The portfolio is made up of four assets: Asset A, Asset B, Asset C, and Asset D. These assets are equally weighted within the portfolio and are each valued at $1,000,000. Asset A has a beta of 1.3.
(a) Calculate the marginal VaR of Asset A.
(b) Interpret the marginal VaR of Asset A.
(c) If you increase the position in Asset A by $400,000, approximate the incremental VaR associated with the trade.
(d) Interpret the incremental VaR from the previous step.
(e) Calculate the component VaR of Asset A.
(f) Interpret the component VaR of Asset A.
3. [2 points] Describe the differences between marginal and incremental VaR. Which one is more accurate?
4. [2 points] Consider a portfolio of 50 positions in stocks and bonds.
(a) If you calculate the variance of the portfolio, how many covariance terms will your calculation involve?
(b) Discuss how VaR mapping may help in estimating VaR of this portfolio.
5. [2 points] Discuss advantages and disadvantages of mapping individual positions to general (primitive) risk factors.
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