A trader has invested $100,000 in Stock A and $150,000 in Stock B. She knows the following: • Stock A's daily average return is 0% and its daily standard deviation is 1%. • Stock B's daily average return is 0% and its daily standard deviation is 4%. • The stocks have a correlation of 0.8. If returns are assumed to be normally distributed, calculate the 10 day Value-at Risk for this portfolio at the 99% level. Use 4-digit decimal places throughout the calculation.
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.
A trader has invested $100,000 in Stock A and $150,000 in Stock B. She knows the following:
• Stock A's daily average return is 0% and its daily standard deviation is 1%.
• Stock B's daily average return is 0% and its daily standard deviation is 4%.
• The stocks have a correlation of 0.8.
If returns are assumed to be
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