Answered: Consider a portfolio that is comprised…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter3: Risk And Return: Part Ii

Section: Chapter Questions

Problem 3P: Two-Asset Portfolio Stock A has an expected return of 12% and a standard deviation of 40%. Stock B...

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Consider a portfolio that is comprised of two stocks A and B. The position in stock A is valued at £70,000 and has daily standard deviation of returns of 1%. The stock B position is valued at £250,000 and has daily standard deviation of returns of 2.5%. Returns in stock A and B are normally distributed and have correlation -0.6.

a) Calculate the 10-day 95% VaR of stock A
b) Calculate the 10-day 95% ES of stock A

Features Features Normal distribution is characterized by two parameters, mean (µ) and standard deviation (σ). When graphed, the mean represents the center of the bell curve and the graph is perfectly symmetric about the center. The mean, median, and mode are all equal for a normal distribution. The standard deviation measures the data's spread from the center. The higher the standard deviation, the more the data is spread out and the flatter the bell curve looks. Variance is another commonly used measure of the spread of the distribution and is equal to the square of the standard deviation.

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