A portfolio manager has positions that include a £100,000 investment in A Corp and a £75,000 investment is B Corp. The position in A Corp has standard deviation of gains and losses of 35% per annum whilst the position in B Corp has standard deviation of gains and losses of 22% per annum. Gains and losses for both A Corp and B Corp are normally distributed while the returns A Corp and B Corp have correlation -0.6 (minus 0.6). When necessary, assume 252 trading days in the calendar year. Based on the above and the table in the Appendix: Calculate the 1-month 99% VaR and ES of the portfolio Calculate the 1-month 99% marginal VaR of each position. Interpret your answer Can the portfolio manager increase the position of A Corp to reduce their market risk exposure? Justify your answer

A portfolio manager has positions that include a £100,000 investment in A Corp and a £75,000 investment is B Corp. The position in A Corp has standard deviation of gains and losses of 35% per annum whilst the position in B Corp has standard deviation of gains and losses of 22% per annum. Gains and losses for both A Corp and B Corp are normally distributed while the returns A Corp and B Corp have correlation -0.6 (minus 0.6). When necessary, assume 252 trading days in the calendar year. Based on the above and the table in the Appendix: Calculate the 1-month 99% VaR and ES of the portfolio Calculate the 1-month 99% marginal VaR of each position. Interpret your answer Can the portfolio manager increase the position of A Corp to reduce their market risk exposure? Justify your answer

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter7: Types And Costs Of Financial Capital

Section: Chapter Questions

Problem 5EP

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A portfolio manager has positions that include a £100,000 investment in A Corp and a £75,000 investment is B Corp. The position in A Corp has standard deviation of gains and losses of 35% per annum whilst the position in B Corp has standard deviation of gains and losses of 22% per annum. Gains and losses for both A Corp and B Corp are normally distributed while the returns A Corp and B Corp have correlation -0.6 (minus 0.6). When necessary, assume 252 trading days in the calendar year. Based on the above and the table in the Appendix: 1. What is the component VaR of each position? 2. What would be the advantages and disadvantages of using Expected Shortfall rather than Value at Risk to measure the risk of this portfolio
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