Question $5$

Suppose you have a portfolio with a long position of $$2$ million in BAA bonds and short $$1m$

in T$-$notes. Volatilities are $1\mathrm{.}58\%$ and $1\mathrm{.}90\%$ per month, respectively, with a correlation of

$0\mathrm{.}9654.$

Do not round intermediate calculations. Round your answer to the nearest dollar $($eg$.32).$

No commas. Use minus sign for negative numbers.

a$)$ Compute the $95\%$ monthly VAR for each position individually

BAA bond VAR

$

T$-$notes VAR

$

b$)$ Compute the $95\%$ portfolio VAR

Portfolio VAR

$

c$)$ Compute the diversification effect

diversification effect

$