Baran

The correct answer is D

The beta, relative to the overall portfolio, of the proposed position is βip = 0.80/0.602 = 2.22, and the beta of the replaced position is βjp= 0.40/0.602=1.11. The volatility impact of the trade is equal to (βip - βjp) × Δw × Vol(Rp) = (2.22 – 1.11) × (2/400) × 0.60 = 0.0033.

 

Baran

The impact of the trade on the VAR of the portfolio is a(n):
A) decrease of $0.95 million.
 
B) decrease of $1.03 million. 
 
C) increase of $0.95 million. 
 
D) increase of $1.03 million.

Baran

The correct answer is C

Impact on VAR = -(E(Ri)-E(Rj)) x Δw x W + (βip - βjp) x 1.65 x Vol(Rp) x Δw x W = - (0.10 -0.06) x (1/100) x 100 + (2.00 - 0.80) x 1.65 x 0.50 x (1/100) x 100 = 0.95.

Baran

3、Suppose that a trader has a portfolio of $5 million that is a portion of his firm’s total portfolio of $200 million. The beta of the trader’s return with the return of the firm is 1.20. The contribution of the trader to the firm value at risk (VAR) of $100 million is:

A) $5.0 million.
 
B) $3.0 million. 
 
C) $2.5 million.
 
D) $20.0 million.

Baran

The correct answer is B

Contribution of trader to VAR = wi x β x VAR(portfolio) = (5/200)(1.2)100 =3.

Baran

4、For a trade small relative to portfolio size, which of the following tends to increase the VAR of the portfolio? Purchasing:

A) an asset that has a higher expected return relative to the portfolio than the asset sold.
 
B) an asset that has a lower beta relative to the portfolio than the asset sold.
 
C) an asset that has a higher beta relative to the portfolio than the asset sold. 
 
D) a low volatility asset.

Baran

2、A firm has a portfolio of traded assets worth $100 million with a VAR of $15 million. The standard deviation of the return on the portfolio is 0.50. The firm is considering the sale of a position worth $1 million in an asset that has an expected return of 6 percent and a covariance of return with the portfolio of 0.20. The position that would be added has an expected return of 10 percent and a covariance of return with the portfolio of 0.50. The VAR is based on a 95 percent confidence level.

The impact of the trade on the volatility of the portfolio is an increase of:

A) 0.004.
 
B) 0.002. 
 
C) 0.008.
 
D) 0.006. 

Baran

The correct answer is D

The beta, relative to the overall portfolio, of the proposed position is βip = 0.50/0.502 = 2.00, and the beta of the replaced position is βjp=0.20/0.502=0.80. The volatility impact of the trade is equal to (βip - βjp) x Δw x Vol(Rp) = (2.00 – 0.80) x (1/100) x 0.50 = 0.006.

Baran

The impact of the trade on the expected return of the portfolio is an increase of:
A) 0.01 percent.
 
B) 0.04 percent. 
 
C) 0.03 percent. 
 
D) 0.02 percent.

Baran

The correct answer is B

The impact on the expected return is (E(Ri)-E(Rj)) x Δw = (0.10 - 0.06) x (1/100)=0.0004 = 0.04%