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Answer: USD 15.0
## Explanation When removing an asset from a portfolio, the reduction in portfolio VaR is calculated as: **Reduction = Current Portfolio VaR - VaR of remaining portfolio** From the table: - Current portfolio VaR = USD 61.6 - If we remove Asset 1, we're left with only Asset 2 - Individual VaR of Asset 2 = USD 46.6 - Since there's only one asset remaining, the portfolio VaR becomes USD 46.6 **Calculation**: Reduction = USD 61.6 - USD 46.6 = USD 15.0 **Why not use VaR Contribution (USD 17.6)?** - VaR Contribution represents the asset's contribution to diversified portfolio risk - When removing an asset, the reduction isn't exactly equal to its VaR contribution due to non-linear diversification effects - The correct approach is to compare the current diversified portfolio VaR with the VaR of the remaining portfolio Therefore, the correct answer is **A. USD 15.0**.
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A risk manager assumes that the joint distribution of returns is multivariate normal and calculates the following risk measures for a 2-asset portfolio:
| Asset | Position | Individual VaR | Marginal VaR | VaR Contribution |
|---|---|---|---|---|
| 1 | USD 100 | USD 23.3 | 0.176 | USD 17.6 |
| 2 | USD 100 | USD 46.6 | 0.440 | USD 44.0 |
| Portfolio | USD 200 | USD 61.6 | USD 61.6 |
If asset 1 is dropped from the portfolio, what will be the reduction in portfolio VaR?
A
USD 15.0
B
USD 38.3
C
USD 44.0
D
USD 46.6