What is the 95% for a portfolio consisting of both investments A and B? (Hint: write out the probabilities of all possible portfolio outcomes.) Is the summation of the 95% VaRs of the individual investments greater or smaller than the 95% VaR of the portfolio? If we measure the risk of an investment or portfolio using VaR, does this suggest that diversification must decrease risk? (Intuitively, putting A and B in a portfolio is a form of diversification.)
What is the 95% for a portfolio consisting of both investments A and B? (Hint: write out the probabilities of all possible portfolio outcomes.) Is the summation of the 95% VaRs of the individual investments greater or smaller than the 95% VaR of the portfolio? If we measure the risk of an investment or portfolio using VaR, does this suggest that diversification must decrease risk? (Intuitively, putting A and B in a portfolio is a form of diversification.)
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 20P
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