An investor is holding a portfolio which comprises 4 million of Bond A and 6 million of Bond B. Bond A has a daily volatility of 0.1%, and Bond Bs daily volatility is 0.3%. The correlation coefficient between A and B is 0.1.

Required:

1. Calculate the value at risk (VaR) of Bond A and Bond B separately and of the combined portfolio over 7 days at 99% confidence level. (8 marks)
2. Using the VaR as calculated in (a) to highlight the benefit of diversification. (2 marks)
3. Critically discussion the key drawbacks of using VaR in risk management. (5 marks)