Mr. X has ₹ 1 crore available for investment. He is considering investing this amount in the ratio of 3:2 in two positively correlated securities, A…
CA Final · Advanced Financial Management · MTP · November 2026
Mr. X has ₹ 1 crore available for investment. He is considering investing this amount in the ratio of 3:2 in two positively correlated securities, A and B. The relevant details of the two securities are as follows: Particulars Security A Security B Daily Standard Deviation 2% 3% Assuming that daily returns are normally distributed, determine the amount that the portfolio is expected to be worth after one week, even after incurring the maximum loss at the 95% confidence level.Note: Z-value at 95% confidence level = 1.645 and number of trading days in a week is 5.
Suggested Answer and Working Notes:
Variance (σ²) of Portfolio = (0.6 x 2%) 2 + (0.4 x 3%) 2 + 2 (0.6) x (0.4) x (2%)(3%)= 5.76Standard Deviation (σ) of Portfolio = √5.76 = 2.40%VaR of Portfolio for a Week= ₹ 1 Crore x 2.40% x √5 x 1.645 = ₹ 2.40 Lakh x 2.236 x 1.645 = ₹ 8.828 Lakh(App.)Expected worth of portfolio even after incurring the maximum loss at the 95% confidence level= 1 crore - ₹8.828 Lakh = 91.172 Lakh
Topics: Risk Management
Related Questions in this Topic
- Consider the following information on two stocks, X and Y: Year Return on X (%) Return on Y (%) 2024-25 10 ...
- Explain briefly the different types of risks to which investors in a securitization transaction are exposed.
- List out the different types of risk associated with investment in Collateralized Debt Obligations (CDOs).
- List out the various indicators to identify the Interest Rate Risk.
- A newly established commodity exchange in India is evaluating whether agricultural and industrial commodities should be ...