Question
II. Consider a position that is comprised of two stocks A and B. The position in stock A is valued at 150,000 and has daily
II. Consider a position that is comprised of two stocks A and B. The position in stock A is valued at 150,000 and has daily standard deviation of returns of 2%. The stock B position is valued at 80,000 and has daily standard deviation of returns of 0.6%. Returns in stock A and B are normally distributed and have correlation 0.7. Based on the above and the table in the Appendix: a) Calculate the 1-week 95% VaR of stock A [5 marks] b) Calculate the 1-week 95% expected shortfall of stock A [10 marks] c) Calculate the 1-week 95% VaR of the portfolio. By how much does diversification reduce the VaR? [20 marks] d) Calculate the marginal and the component VaR of each position. Interpret your results [20 marks]
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