Sumitomo Bank's risk manager has estimated that the DEARs of two of its major assets in its trading portfolio,foreign exchange and bonds,are -$150,000 and -$250,000,respectively.

What is the total DEAR of Sumitomo's trading portfolio if the correlation among assets is assumed to be 0.80?

Question

Sumitomo Bank's risk manager has estimated that the DEARs of two of its major assets in its trading portfolio,foreign exchange and bonds,are -$150,000 and -$250,000,respectively.

What is the total DEAR of Sumitomo's trading portfolio if the correlation among assets is assumed to be 0.80?

Quizplus · Accepted Answer

The total DEAR is calculated using the formula: √(DEAR1² + DEAR2² + 2 * correlation * DEAR1 * DEAR2). Plugging in the values: √((-150,000)² + (-250,000)² + 2 * 0.80 * (-150,000) * (-250,000)) = -$380,789.

Sumitomo Bank's Risk Manager Has Estimated That the DEARs of Two