Question $2(25$ points$)$

You manage a portfolio consisting of $500$ shares of Alfa Laval, $700$ shares of Boliden, $400$

shares of Hexagon, and $800$ shares of H&M$.$ In Table $1$ below you can find information

about the current price of each stock, the expected return on an annual basis for each stock,

as well as the estimated covariance matrix of returns $($on an annual basis$).$

Table $1$: Stock data

a$)$ What is the expected return for the portfolio over the coming $5$ months, i$.$e$.,105$

days? $(3$p$)$

b$)$ What is the worst loss for each of your stock holdings and totally on your portfolio,

respectively, over the coming $5$ months $($ie$.,105$ days$),$ given a confidence level of

$99$ percent? Base your calculations on the relative parametric value$-$at$-$risk for the

individual stocks and for the portfolio, respectively, assuming that the returns are

normally distributed. Also, calculate the undiversified VaR and the monetary gains

from diversification. $(12$p$)$

c$)$ Explain what is meant by stress testing. Outline the general process and discuss

what measures a financial institution can make if the stress loss appears

unacceptable large. $(10$p$)$