A portfolio can be mapped to the following two zero-coupon bonds: Bond Yield Maturity in Years Annual Std. Dev. of Yield Exposure A 5% 2 0.50% $25 B 3% 13 1.20% $75 The correlation between the two returns is 0.25. Changes of the yields are assumed to follow normal distributions with mean of 0 and the standard deviations shown above. What is the diversified and undiversified 10-day VaR (at 95% level) of this portfolio? Hint: The first step is to calculate the VaR of each bond. It could be estimated by a delta-normal approach, where the "delta (sensitivity to the underlying risk factor) should be the modified duration of each bond. The modified duration of a zero-coupon bond is calculated as: Maturity D* = 1 + Yield The VaR of each bond will be VaRD* * 295%| * 010-day * Exposure. A portfolio can be mapped to the following two zero-coupon bonds: Bond Yield Maturity in Years Annual Std. Dev. of Yield Exposure A 5% 2 0.50% $25 B 3% 13 1.20% $75 The correlation between the two returns is 0.25. Changes of the yields are assumed to follow normal distributions with mean of 0 and the standard deviations shown above. What is the diversified and undiversified 10-day VaR (at 95% level) of this portfolio? Hint: The first step is to calculate the VaR of each bond. It could be estimated by a delta-normal approach, where the "delta (sensitivity to the underlying risk factor) should be the modified duration of each bond. The modified duration of a zero-coupon bond is calculated as: Maturity D* = 1 + Yield The VaR of each bond will be VaRD* * 295%| * 010-day * Exposure