Explanation:
For two assets that are perfectly correlated (), there are no diversification benefits. Thus, the portfolio Value at Risk (VaR) is simply the algebraic sum of the individual VaRs.
VaR_{portfolio} = VaR_1 + VaR_2 = \`7.3 \text{ million} + \5.4` \text{ million} = \`12.70` \text{ million}$.
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Q.20 Simon Sarkar is an analyst at Indo-Sino Investments, a large asset management company in India. He is evaluating the risk of a portfolio and computes the VaR for the two positions in the portfolio: VaR₁ = $7.3 million; and VaR₂ = $5.4 million. If the returns of the two assets are perfectly correlated, the VaR of the portfolio VaRₚ is closest to:
A
$63.45 million
B
$12.70 million
C
$82.45 million
D
$9.08 million