Question No 1:

Consider a position consisting of a $10 million investment in asset A and a $5 million investment in asset B. Assume that the daily volatility of both assets are 1% and that the coefficient of correlation between their returns is 0.3.

a. Calculate standard deviation (sigma) considering daily volatility percentage of total investment of security A and B

b. What is the 10-day 99% VaR for the portfolio if N/ Z score=-2.33 at 99%?

(3 marks)

Question No 2:

Consider a position consisting of a $120000 million investment in asset A and a $600000 million investment in asset B. Assume that the daily volatility of both assets are 2% and 1% that the coefficient of correlation between their returns is 0.3.

a. Calculate standard deviation (sigma) considering daily volatility percentage of total investment of security A and B

b. What is the 5-day 95% VaR for the portfolio if N/ Z score=-1.65 at 95%?

(3 marks)

Question No 3:

Compare Monte Carlo simulations method and stress testing and state advantages and disadvantages of using each of these. (4 marks)