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Question 2(25 points) You manage a portfolio consisting of 500 shares of Alfa...

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Finance

Question 2(25 points)
You manage a portfolio consisting of 500 shares of Alfa Laval, 700 shares of Boliden, 400
shares of Hexagon, and 800 shares of H&M. In Table 1 below you can find information
about the current price of each stock, the expected return on an annual basis for each stock,
as well as the estimated covariance matrix of returns (on an annual basis).
Table 1: Stock data
a) What is the expected return for the portfolio over the coming 5 months, i.e.,105
days? (3p)
b) What is the worst loss for each of your stock holdings and totally on your portfolio,
respectively, over the coming 5 months (ie.,105 days), given a confidence level of
99 percent? Base your calculations on the relative parametric value-at-risk for the
individual stocks and for the portfolio, respectively, assuming that the returns are
normally distributed. Also, calculate the undiversified VaR and the monetary gains
from diversification. (12p)
c) Explain what is meant by stress testing. Outline the general process and discuss
what measures a financial institution can make if the stress loss appears
unacceptable large. (10p)
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