Question
You decided to use the Value-at-risk approach to analyze the potential risks associated with investing in two stocks (Tesla and Apple). To implement this analysis,
You decided to use the Value-at-risk approach to analyze the potential risks associated with investing in two stocks (Tesla and Apple). To implement this analysis, you downloaded data on the past daily stock returns over the past year for these companies. The data is available on Canvas (real data for these two companies). Your analysis focuses on a one-quarter horizon (63 trading days) and a 10% VAR.
(a) Calculate the standard deviation of daily stock returns over the past year (period with available data) for the two companies. (Note: You can use the command STDEV in Excel).
(b) Using your estimates from part (a), determine the standard deviation of stock returns for each stock over the next quarter. You should assume that daily stock returns are
independent across different days.
(c) Under the assumption that stock returns are normally distributed, calculate the 10% VAR
for each of the two stocks. This should be based on the one-quarter horizon described above. These values should be in dollar terms, under the assumption that there is an initial investment of $200K in each stock.
(d) John wants to invest in each of these stocks. When deciding how much to invest in each stock, he decided that his 10% VAR in each specific stock cannot be larger than $15K, i.e. he wants to limit his losses in each of the two stocks to $15K (per stock) with a level of confidence equal to 90%. What is the maximum amount that he can invest in each of the two stocks? Why are these values different for the two companies? You should analyze the VAR separately for each company.
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