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  3. 2. you are given with the following information on

2. You are given with the following information on your portfolio: you have a $6million...

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Finance

2. You are given with the following information on your portfolio: you have a $6million portfolio that consists of two funds. The historical daily rates of return for these assets are shown in the following table. That is, these are the sampled 7-day observations from the daily rates of return for the funds and applied for estimates for the volatility.

Fund1

12.5%

-9.75%

17.92%

11.07%

8.19%

19.45%

-7.16%

Fund2

-3.74%

14.59%

21.49%

21.7%

6.38%

22.16%

-9.41%

Answer the following questions:

a) Find estimates for the volatility of each fund (in terms of standard deviation) on the samples given above.

b) Suppose you own $2 million worth of fund 1, what is the one-year (95%-confidence) VaR for this fund if normal distribution is assumed?

c) Suppose you own $4 million work of fund 2, what is the one-year (95%-confidence) VaR for this fund?

d) Let the correlation coefficient between these two funds be 0.67. What is the 7-day 95%VaR for your portfolio with the above allocation in fund 1 and fund 2?

e) Now suppose you want to apply the Random Resampling approach for this portfolio. Suppose you apply 15 replications. What is the (95%-confidence) VaR for this portfolio now?

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