Identify the value at risk of the portfolio

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Reference no: EM132028774

Consider a portfolio that has equal amounts of $10 invested in two assets. Suppose returns on the two assets are jointly normally distributed. The annual expected returns and variance of returns on the first asset are given by:

u1=.10 o (2/1) = .04

and those for the second asset are given by:

u2 = .05 o (2/2) = .03

Consider three cases:

a: The correlation between the returns is p = 0

b: The correlation between the returns is p= +.50

c: The correlation between the returns is p= -.50

For each case, identify the 99 percent Value at Risk of the portfolio. Explain the pattern of dependence of VaR on the correlation.

Reference no: EM132028774

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