You invest $100 each in two bonds. Each bond will pay you $110 at the end of the year with probability 0.98 and nothing with probability 0.02. The correlation between the bonds is zero. In this scenario, the 95%-VaR of your portfolio is

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The 95%-VaR (Value at Risk) indicates the maximum loss over a specific period at a certain confidence level, here 95%. Given the zero correlation between the bonds, the probability of both bonds defaulting simultaneously is 0.02 * 0.02 = 0.0004 (0.04%). Since this probability is less than 5%, the worst-case scenario within the 95% confidence interval is the default of one bond, leading to a loss of $100 (as you receive nothing for the defaulted bond but still receive $110 for the other, netting a $10 gain on the second bond against the $100 investment). Therefore, the 95%-VaR, representing the maximum expected loss at this confidence level, is -$100, indicating a potential loss of up to $100.

You Invest $100 Each in Two Bonds −20- 20−20 B) Zero

You Invest $100 Each in Two Bonds $- 20$
B) Zero