wanganjie

 

The correct answer is D

We can use matrix notation to derive the dollar variance of the portfolio:

 

 [attach]13956[/attach]

This value is in ($ millions)2. VAR is then the square root of this value times 1.65: VAR = 1.65 × ($1,414,214) = $2,333,452.

wanganjie

 

3、Which of the following is NOT a primary factor affecting the risk of a portfolio?

A) Total risk for a large portfolio of diversified assets. 

B) The degree to which assets within the portfolio move together.

C) A high degree of concentration in one asset within the portfolio.

D) The volatility of individual assets held within the portfolio.

wanganjie

 

The correct answer is A

In a diversified portfolio with a large number of assets, the most relevant risk is systematic risk since the unsystematic (i.e., firm-specific risk) gets diversified away. In other words, the unsystematic risks of the individual assets offset each other.

wanganjie

 

2、An investor has two stocks, Stock R and Stock S in her portfolio. Given the following information on the two stocks, the portfolio's standard deviation is closest to:

σR = 34%

σS = 16%

rR,S = 0.67

WR = 80%

WS = 20%

A) 8.7%.

B) 2.1%.

C) 29.4%.

D) 7.8%.

wanganjie

 

The correct answer is C

The formula for the standard deviation of a 2-stock portfolio is:

s = [WA2sA2 + WB2sB2 + 2WAWBsAsBrA,B]1/2

s = [(0.82 × 0.342) + (0.22 × 0.162) + (2 × 0.8 × 0.2 × 0.34 × 0.16 × 0.67)]1/2 = [0.073984 + 0.001024 + 0.0116634]1/2 = 0.08667141/2 = 0.2944, or approximately 29.4%.

wanganjie

 

The correct answer is D

This is the definition of component VaR. It will generally be less than the VaR of the fund by itself because of the diversification of some of the fund’s risk at the portfolio level.

wanganjie

 

AIM 7: Describe ways we can compute component VARs for a distribution of returns that is not normal or elliptical.

Computing component VAR for a position using the position’s beta with respect to the entire portfolio is appropriate for returns that follow:

A) an elliptical distribution but not a normal distribution. 

B) both an elliptical distribution and a normal distribution. 

C) a normal distribution but not an elliptical distribution. 

D) neither an elliptical distribution nor a normal distribution. 

wanganjie

 

The correct answer is B

It is appropriate for elliptical distributions, and normal distributions are a subset of elliptical distributions.

wanganjie

 

AIM 2: For a two-asset portfolio, compute the portfolio VAR when the returns have no correlation and perfect correlation, respectively.

1、Simply adding the VARs for each security in a portfolio to compute the portfolio value at risk (VAR) implies the assumption of:

A) perfect and negative correlation.

B) imperfect and positive correlation.

C) imperfect and negative correlation.

D) perfect and positive correlation.

wanganjie

 

The correct answer is D

Simply adding the VARs of individual securities to compute the portfolio VAR assumes that there is a correlation of “1” between all the securities. A correlation value of “1”, is perfect and positive. This is called the undiversified VAR.