Q$.$ No$.2$

$($i$)$

A portfolio has USD $2$ million invested in Stock A and USD $1$ million invested in Stock B$.$ The

$95\%1-$day value at risk for each individual position is USD $40,000.$ The Correlation between the

returns of Stock A and Stock B is $0\mathrm{.}5.$ Calculate the portfolio Value at Risk.

The portfolio manager decides to re$-$balance the portfolio by selling USD $1$ million of Stock A$,$

buy USD $1$ million of Stock B$,$ assuming that the returns are normally distributed, and re$-$

$\frac{1}{4}$

balancing of the portfolio does not affect the, volatility of the individual stocks $($correlation as

well$),$ what will be revised Value at Risk of the portfolio

$($ii$)$

What is Market Risk? Discuss different types of Market risk and how to mitigate the same.