Question 7

A portfolio manager in the US holds two distinct classes of shares. The first

class is identical to the S&P 500 and is worth $20 million with an expected return

of 21% and a standard deviation of 15%. The second class is identical to the

Nikkei 300 (an index of Japanese stock) and is valued at $20 million with an

expected return of 14% and a standard deviation of 10%. Assume that all currency

risk is hedged. The correlation between the S&P 500 and Nikkei 300 is 0.22 (all

figures are annualised, 365 days per year).

Calculate the 1% quarterly VAR using the variance-covariance method.