As the Head of Investment for your company you are expected to compute the 10% value-at-risk for your company’s portfolio containing two categories of assets. The first category includes stocks which are traded on the Ghana Stock Exchange (GSE) with an expected return of 12% and Standard Deviation (SD) of 10% per annum. The second category contains GoG Bonds with an expected return of 15% and Standard Deviation (SD) of 3% per annum. The annual correlation between the two categories of assets is 70% or .7. The total portfolio value is US$5 million. The total investment in the Ghana stock exchange is US$3 million and US$2 invested in bonds. The Z-value for a normal distribution curve for 90% confidential level is 1.282. The formula for computing Expected Rp= Wg (Xg) + Wb(Xb) and variance is SDp2 = (Wg)(Wg)(SDg)(SDg) + (Wb)(Wb)(SDb)(SDb)+ (Wb)(Wb)(SDb)(SDb)+2(Wg)(Wb)(SDg)(SDb)(p) and to compute VaR = E(R)-Z-value(SDp) (Total Invested Amount) Compute the portfolio expected rate of rate standard deviation the value at risk.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
As the Head of Investment for your company you are expected to compute the 10% value-at-risk for your company’s portfolio containing two categories of assets. The first category includes stocks which are traded on the Ghana Stock Exchange (GSE) with an expected return of 12% and Standard Deviation (SD) of 10% per annum. The second category contains GoG Bonds with an expected return of 15% and Standard Deviation (SD) of 3% per annum. The annual correlation between the two categories of assets is 70% or .7. The total portfolio value is US$5 million. The total investment in the Ghana stock exchange is US$3 million and US$2 invested in bonds. The Z-value for a
- Compute the portfolio expected rate of rate
- standard deviation
- the value at risk.
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