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Assume a firm has two assets in an investment portfolio. The annual return characteristics and the standard deviations are show below. The current portfolio is

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Assume a firm has two assets in an investment portfolio. The annual return characteristics and the standard deviations are show below. The current portfolio is worth $125M of which $75M is invested in asset class 1 and the remaining amount in asset class 2. The correlation of Asset 1 with Asset 2 is 0.10 a. Assuming normality, what is the 1-year VaR(5%) for this portfolio? Report the VaR(5%) in two ways: (i) the dollar threshold associated with 5th percentile; and (ii) losses relative to expected value. b. Determine the annual VaR(5%) corresponding to a trade where the firm sells 1% of its portfolio in Asset 1 & uses the proceeds to purchase Asset 2

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