4) You work for an investment bank and a client of yours, Triss is worried about investing her $2,500,000 with your bank and she has asked for your advice. Due to some technical difficulties only Netflix (NFLX) and Tesla (TSLA) are available on your system screen. Return Standard Deviation (Sigma-o) NFLX 2.50% 1.08% TSLA 1.75% 0.62% a) Triss was frightened because one of her best friends, Ciri, told her last night: "My dear, the stock market fell sharply and I lost $50,000 of my investment within a day". Explain to Triss the financial measure that Ciri was talking about. Outline how it works and what it calculates. [5 marks] b) Calculate the Value at Risk (VaR) at the 1% significance level for 1-day ahead for both indices. Can you reassure Triss that she won't lose as much as Ciri? Which of the two investments is safer? [10 marks] c) You are a very clever analyst and remember that a portfolio of assets has lower Standard deviation than the assets separately when the correlation of the assets is lower than 1. You calculate the correlation between NFLX and TSLA and find it to be 0.40 (p Pm,FTSE = 0.30). You suggest to Triss that investing 65% in NFLX (WFTSE = 0.65) and 35% in TSLA (wm = 0.35) will reduce her risk even further. 4 Calculate the return, standard deviation and VaR of the portfolio of Triss. Is this VaR lower or higher than those in part b? [10 marks] 4) You work for an investment bank and a client of yours, Triss is worried about investing her $2,500,000 with your bank and she has asked for your advice. Due to some technical difficulties only Netflix (NFLX) and Tesla (TSLA) are available on your system screen. Return Standard Deviation (Sigma-o) NFLX 2.50% 1.08% TSLA 1.75% 0.62% a) Triss was frightened because one of her best friends, Ciri, told her last night: "My dear, the stock market fell sharply and I lost $50,000 of my investment within a day". Explain to Triss the financial measure that Ciri was talking about. Outline how it works and what it calculates. [5 marks] b) Calculate the Value at Risk (VaR) at the 1% significance level for 1-day ahead for both indices. Can you reassure Triss that she won't lose as much as Ciri? Which of the two investments is safer? [10 marks] c) You are a very clever analyst and remember that a portfolio of assets has lower Standard deviation than the assets separately when the correlation of the assets is lower than 1. You calculate the correlation between NFLX and TSLA and find it to be 0.40 (p Pm,FTSE = 0.30). You suggest to Triss that investing 65% in NFLX (WFTSE = 0.65) and 35% in TSLA (wm = 0.35) will reduce her risk even further. 4 Calculate the return, standard deviation and VaR of the portfolio of Triss. Is this VaR lower or higher than those in part b? [10 marks]
