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Consider a position consisting of a $120,000 investment in asset A and a $120,000 investment in...

Consider a position consisting of a $120,000 investment in asset A and a $120,000 investment in asset B. Assume that the daily volatilities of both assets are 1% and that the coefficient of correlation between their returns is 0.4. What are the five-day 95% VaR and ES for the portfolio?

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Expert Solution

Standard deviation of daily change = $120,000 x 1% = 1,200

Variance of portfolio of daily change = (1.200^2) + (1200^2) + (2 x 0.4 x 1200 x 1200) = 4,032,000

The standard deviation of daily change = 4,032,000^1/2
= 2,007.98

Standard deviation of 5 day change = 2,007.98 x 5^1/2
= 4,489.99

Value of normal distribution at 95% VaR for 5 days = 4,489.99 x 1.645
= $7,386.03

jeff jeffy answered 2 years ago
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