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A firm has a portfolio composed of stock A and B with normally distributed returns. Stock A has an annual expected return of 15% and annual volatility of 20%. The firm has a position of $100 million in stock A. Stock B has an annual expected return of 25% and an annual volatility of 30% as well. The firm has a position of $50 million in stock B. The correlation coefficient between the returns of these two stocks is 0.3.
a. Compute the 5% annual VAR for the portfolio. Interpret the resulting VAR.
b. What is the 5% daily VAR for the portfolio? Assume 365 days per year.
c. If the firm sells $10 million of stock A and buys $10 million of stock B, by how much does the 5% annual VAR change?
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