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Company WatchMyRisk is trying to evaluate the market risk for the two securities it holds. The first security, stock A, has a market position value

Company WatchMyRisk is trying to evaluate the market risk for the two securities it holds. The first security, stock A, has a market position value of $5,000. The second security is stock B, with a market position value of $10,000. The correlation between these two securities is -0.2. The company also estimates that: the return of stock A follows a normal distribution with mean 0 and a standard deviation of 1%; the return of stock B follows a normal distribution with mean 0 and a standard deviation of 2%.

The Company wants to estimate the potential price impact when extremely adverse situations happen. It defines "extremely adverse" situations separately for stock A and stock B as follows:

1. The extremely adverse situation for stock A is such that it only happens no more than 5% of the time

2. The extremely adverse situation for stock B is such that it only happens no more than 2.5% of the time.

[Note: If a random variable "t" follows a normal distribution, then

Pr(-1.65 t +1.65)=90% -- Meaning that the probability t falls in between 1.65 standard deviations on the two sides of the mean is 90%;

Pr(-1.96t+1.96)=95%)]

Answer the following questions:

1) What is the DEAR (daily earnings at risk) for stock B, if the extremely adverse situation happens? What is the 10-day VAR for stock B? (10 points)

2)What is the DEAR (daily earnings at risk) for stock A, if the extremely adverse situation happens? (5 points)

3) What is the DEAR for the Company's two securities as a portfolio if the extremely adverse situation happens (as defined separately for stock A and stock B)? (10 points)

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