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%

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

The correct answer is C

A trade increases VAR if the asset bought has a higher beta coefficient with respect to the portfolio than the asset sold, or if it has a lower expected return.

Baran

5、Suppose a trader has a portfolio of $20 million of his firm’s total portfolio of $500 million. The beta of the trader’s return with the return of the firm is 0.50. The contribution of the trader to the firm VAR of $100 million is:

A) $4 million.
 
B) $8 million.
 
C) $2 million.
 
D) $50 million.

Baran

The correct answer is C

Contribution of trader to VAR = wi × β × VAR(portfolio) = ($20 / $500)(0.5)$100 = $2 million.