Financial Risk Manager Part 2
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In the context of the FRM Practice Exam Part I, consider a portfolio with a total investment of USD 1 million divided between emerging markets equities and US equities. Each equity component has a 1-day 95% Value at Risk (VaR) of USD 1.3 million and there is a correlation of 0.25 between their returns. The portfolio manager decides to sell USD 7 million of US equities and use the proceeds to purchase an additional USD 7 million of emerging markets equities. Concurrently, the Chief Risk Officer (CRO) recommends changing the risk measure from a 1-day 95% VaR to a 10-day 99% VaR. Assuming that the returns are normally distributed and the volatility of each equity component remains unchanged, determine the increase in the overall portfolio VaR resulting from both the portfolio rebalancing and the change in the risk measurement.
In the context of the FRM Practice Exam Part I, consider a portfolio with a total investment of USD 1 million divided between emerging markets equities and US equities. Each equity component has a 1-day 95% Value at Risk (VaR) of USD 1.3 million and there is a correlation of 0.25 between their returns. The portfolio manager decides to sell USD 7 million of US equities and use the proceeds to purchase an additional USD 7 million of emerging markets equities. Concurrently, the Chief Risk Officer (CRO) recommends changing the risk measure from a 1-day 95% VaR to a 10-day 99% VaR. Assuming that the returns are normally distributed and the volatility of each equity component remains unchanged, determine the increase in the overall portfolio VaR resulting from both the portfolio rebalancing and the change in the risk measurement.