We have $15 million in Stock A, and $10 million in Stock B. Assume N = 10
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Question:
We have $15 million in Stock A, and $10 million in Stock B. Assume
N = 10 (days) and X = 99%. Assume daily volatility of Stock A of
2% and daily volatility of Stock B of 1%. The correlation coefficient
is 0.3. The total value of the stocks exhaust the wealth, which means
the total value of the fund is V = $15m+$10m = $25m. Assuming
normal distribution, with N = 10 (days) and X = 99%, by how
much in dollars the diversification reduces 1-day and 10-day-VaR,
and 1-day and 10-day ES. Hint: Assume = 0, and compute the
the N-day VaRs and N-day ESs for the individual stocks, and then
compute the same by combining the two stocks in a portfolio.
NOTE: Please provide calculations with formula.
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