Explanation:
Assume X be the risk budget allocation to each manager. This should be such that:
X^2 + X^2 + 2\sigma XX = \`$1.4`^2Solving for X, we get X^2[1 + 1 + 2(1)] = \`1.4`^2$
4`x^2 = 1.4^2 \ X = 0.7 \text{ billion}
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Q.3167 Alan Green is an equity strategist at Platinum Investments. The firm has a large cap equity fund that has a net asset value (NAV) of $5.6 billion and is fully invested in equities. The returns are normal distributed with volatility of 12% per annum. The fund measures absolute risk with a 95%, one-year VAR at $1.4 billion. The fund wants to allocate this risk to two equity managers, each with the same VAR budget. Given that the correlation between the returns generated by the two managers is 1.0, the VAR budget for each fund manager should be:
A
$0.41 billion
B
$1.06 billion
C
$0.72 billion
D
$0.70 billion
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