You have to compute the VaR (Value at Risk) of a portfolio with a probability of 5% (confidence level of 95%). Your portfolio is worth $100 million evenly invested in two assets (50 million in asset 1 and 50 million in asset 2). Here are some statistics for monthly returns of the two assets:
E(R₁) = E(R₂) = 0%
$\sigma$ (R₁) = 5%
$\sigma$ (R₂) = 7%
Correlation = 0.5.
You make the hypothesis that the distributions are normal.
You know that in a normal distribution 5% of the observations lie below -1.645* $\sigma$ .
a. What is the monthly VaR of the portfolio with a 5% probability?
b. What is the one-year VaR of the portfolio with a 5% probability?

Question

You have to compute the VaR (Value at Risk) of a portfolio with a probability of 5% (confidence level of 95%). Your portfolio is worth $100 million evenly invested in two assets (50 million in asset 1 and 50 million in asset 2). Here are some statistics for monthly returns of the two assets:
E(R₁) = E(R₂) = 0%

\sigma

(R₁) = 5%

\sigma

(R₂) = 7%
Correlation = 0.5.
You make the hypothesis that the distributions are normal.
You know that in a normal distribution 5% of the observations lie below -1.645*

\sigma

.
a. What is the monthly VaR of the portfolio with a 5% probability?
b. What is the one-year VaR of the portfolio with a 5% probability?

Quizplus · Accepted Answer

The Answer of You have to compute the VaR (Value at Risk) of a portfolio with a probability of 5% (confidence level of 95%). Your portfolio is worth $100 million evenly invested in two assets (50 million in asset 1 and 50 million in asset 2). Here are some statistics for monthly returns of the two assets: E(R₁) = E(R₂) = 0% $\sigma$(R₁) = 5% $\sigma$(R₂) = 7% Correlation = 0.5. You make the hypothesis that the distributions are normal. You know that in a normal distribution 5% of the observations lie below -1.645* $\sigma$. a. What is the monthly VaR of the portfolio with a 5% probability? b. What is the one-year VaR of the portfolio with a 5% probability?

You Have to Compute the VaR (Value at Risk) of a Portfolio