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A)Suppose you have two stocks (A and B) in your portfolio, worth $120,000 and $250,000 respectively. The annual volatility is 0.28 and 0.22...
A)Suppose you have two stocks (A and B) in your portfolio, worth $120,000 and $250,000 respectively. The annual volatility is 0.28 and 0.22 respectively. The correlation between the two stocks is 0.45. Please calculate the 5-day, 99% VaR and ES (expected shortfall) for the two positions separately and for the portfolio. How much is the VaR reduction in the portfolio? How much is the ES reduction in the portfolio? Re-calculate the portfolio VaR and ES and the corresponding reductions assuming a correlation of -0.45 and 1.0. What can you conclude? (Hint: for accuracy and convenience, it is a good idea to set up the calculation in a spreadsheet. Also, assume 252 days in a year.)
