Problem 2 (10 points) A firm has currently assets in place worth $60 million that have a volatility (standard deviation) of 20%. A new investment will add assets worth $40 million and a volatility of o. Use the data in the worksheet "Q2 (Data)." The worksheet contains the firm's estimates of the % returns that the new investment will earn under different scenarios, along with the estimated probabilities of the different scenarios. Calculate the standard deviation of returns using this data, and use that as your estimate of o. You can then assume that the correlation coefficient between the two sets of assets (existing assets and the assets from the new investment) is 0.1 (or 10%). Calculate the combined volatility and the VAR at 95% confidence level (both in terms of dollars and % of total assets). Standard Normal Distribution PIZ 52) Z 10% 1.28 6% 1.56 5% 1.65 4% 1.75 3% 1.88 2% 2.05 1% 2.33 * Scenario Probability Returns (%) 0.02% 80.00% 2 0.33% 65.00% 3 5.95% 35.00% 4 11.78% 30.00% 5 10.51% 20.00% 6 9.89% 18.00% 7 8.65% 17.33% 8 10.41% 11.00% 9 7.31% 15.00% 10 8.56% 9.00% 11 12.39% 2.00% 12 7.43% 5.67% 13 1.18% 11.21% 14 0.95% 8.67% 15 1.05% -5.50% 16 1.12% -15.69% 17 1.00% -18.00% 18 1.17% -20.00% 19 0.12% -45.00% 20 0.18% -80.00% Sum 100.00% Problem 2 (10 points) A firm has currently assets in place worth $60 million that have a volatility (standard deviation) of 20%. A new investment will add assets worth $40 million and a volatility of o. Use the data in the worksheet "Q2 (Data)." The worksheet contains the firm's estimates of the % returns that the new investment will earn under different scenarios, along with the estimated probabilities of the different scenarios. Calculate the standard deviation of returns using this data, and use that as your estimate of o. You can then assume that the correlation coefficient between the two sets of assets (existing assets and the assets from the new investment) is 0.1 (or 10%). Calculate the combined volatility and the VAR at 95% confidence level (both in terms of dollars and % of total assets). Standard Normal Distribution PIZ 52) Z 10% 1.28 6% 1.56 5% 1.65 4% 1.75 3% 1.88 2% 2.05 1% 2.33 * Scenario Probability Returns (%) 0.02% 80.00% 2 0.33% 65.00% 3 5.95% 35.00% 4 11.78% 30.00% 5 10.51% 20.00% 6 9.89% 18.00% 7 8.65% 17.33% 8 10.41% 11.00% 9 7.31% 15.00% 10 8.56% 9.00% 11 12.39% 2.00% 12 7.43% 5.67% 13 1.18% 11.21% 14 0.95% 8.67% 15 1.05% -5.50% 16 1.12% -15.69% 17 1.00% -18.00% 18 1.17% -20.00% 19 0.12% -45.00% 20 0.18% -80.00% Sum 100.00%
