Question
QUESTION 1 (100 marks in total) A portfolio manager has positions that include a 100,000 investment in A Corp and a 75,000 investment is B
QUESTION 1 (100 marks in total) A portfolio manager has positions that include a 100,000 investment in A Corp and a 75,000 investment is B Corp. The position in A Corp has standard deviation of gains and losses of 35% per annum whilst the position in B Corp has standard deviation of gains and losses of 22% per annum. Gains and losses for both A Corp and B Corp are normally distributed while the returns A Corp and B Corp have correlation -0.6 (minus 0.6). When necessary, assume 252 trading days in the calendar year. Based on the above and the table in the Appendix: a) Calculate the 1-day 99% VaR of A Corp and of B Corp [10 marks] b) Calculate the 1-day 99% Expected Shortfall (ES) of A Corp and of B Corp [10 marks] c) Using your answers to (a) and (b) calculate the 1-month VaR and ES of A Corp and of B Corp. [20 marks] d) Calculate the 1-month 99% VaR and ES of the portfolio [20 marks] e) Calculate the 1-month 99% marginal VaR of each position. Interpret your answer [20 marks] f) Can the portfolio manager increase the position of A Corp to reduce their market risk exposure? Justify your answer [5 marks] g) What is the component VaR of each position? [5 marks] h) What would be the advantages and disadvantages of using Expected Shortfall rather than Value at Risk to measure the risk of this portfolio [10 marks]
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