A UK investor buys $1 million of UK stocks in a portfolio with beta 1.2 with respect to the UK market index, and $2 million of US stocks in a portfolio with beta 0.8 w.r.t. with respect to the US market index. Suppose the FTSE 100, S&P 500 and £/$ volatilities are 15%, 10% and 35% respectively, and their correlations are: %UK−US = 0.7, %UK−£/$= 0.4 and %US−£/$= 0.5. Calculate the VaR due to each market risk factor and then aggregate this into (a) the equity VaR and (b) the total systematic VaR. For each VaR figure apply the normal linear model and use 99% confidence (i.e. α = 1%) and h = 10 days for the risk horizon. Express all your answers in $.

A UK investor buys $1 million of UK stocks in a portfolio with beta 1.2 with respect to the UK market index, and $2 million of US stocks in a portfolio with beta 0.8 w.r.t. with respect to the US market index. Suppose the FTSE 100, S&P 500 and £/$ volatilities are 15%, 10% and 35% respectively, and their correlations are: %UK−US = 0.7, %UK−£/$= 0.4 and %US−£/$= 0.5. Calculate the VaR due to each market risk factor and then aggregate this into (a) the equity VaR and (b) the total systematic VaR. For each VaR figure apply the normal linear model and use 99% confidence (i.e. α = 1%) and h = 10 days for the risk horizon. Express all your answers in $.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 4P: An analyst has modeled the stock of a company using the Fama-French three-factor model. The market...

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