Question
The analytical method also called the variance-covariance method makes use of knowledge of the input values and any pricing models along with assumptions of normal
The analytical method also called the variance-covariance method makes use of knowledge of the input values and any pricing models along with assumptions of normal distribution to analyze risk. The historical returns of two investments A and B for a given period in time are summarized in the table below showing percentage rates of return and probability occurrences
Probability Investment A % Investment B %
0.2 12 19
0.1 10 20
0.4 14 17
0.3 18 10
Required:
i.Determine the optimum risk of a portfolio consisting of A and B (5 Marks)
ii. Given that the value of the investment portfolio is sh.1.5 Million determine the Value at risk of this portfolio at 95% confidence(2 Marks)
iii. Discuss the Strategies that the investor will use to minimize the risk exposure in (ii) above(8 marks)
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