Financial Risk Manager Part 2

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Explanation:

\text{VaR}_p = \sqrt{(\text{VaR}_A^2 + \text{VaR}_B^2 + 2 \times \rho_{AB} \times \text{VaR}_A \times \text{VaR}_B)}

Initial portfolio VaR $_p$ = $\sqrt{2.3^2 + 1.7^2 + 2 \times 0.6 \times 2.3 \times 1.7} = 3.59$ million

Then, we calculate readjusted after the rebalancing of individual stock:

Readjusted daily VaR of JetAero = $[\frac{(40 - 7)}{40}] \times 2.3 = 1.8975$ million
Readjusted daily VaR of Indigo = $[\frac{(25 + 7)}{25}] \times 1.7 = 2.176$ million

New VaR of the portfolio is = $\sqrt{1.8975^2 + 2.176^2 + 2 \times 0.6 \times 1.8975 \times 2.176} = 3.65$ million

Therefore, the VaR will increase by (3,650,000 − 3,590,000), or $60,000.

Explanation:

\text{VaR}_p = \sqrt{(\text{VaR}_A^2 + \text{VaR}_B^2 + 2 \times \rho_{AB} \times \text{VaR}_A \times \text{VaR}_B)}

Initial portfolio VaR $_p$ = $\sqrt{2.3^2 + 1.7^2 + 2 \times 0.6 \times 2.3 \times 1.7} = 3.59$ million

Then, we calculate readjusted after the rebalancing of individual stock:

Readjusted daily VaR of JetAero = $[\frac{(40 - 7)}{40}] \times 2.3 = 1.8975$ million
Readjusted daily VaR of Indigo = $[\frac{(25 + 7)}{25}] \times 1.7 = 2.176$ million

New VaR of the portfolio is = $\sqrt{1.8975^2 + 2.176^2 + 2 \times 0.6 \times 1.8975 \times 2.176} = 3.65$ million

Therefore, the VaR will increase by (3,650,000 − 3,590,000), or $60,000.

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Q.3165 Abraham Bell is a portfolio manager at Tipu Investment. He has `$40` million invested in JetAero Engineering and `$25` million in Indigo Engineering. The 95% 1-day VaR are `$2.3` million and `$1.7` million for JetAero and Indigo, respectively. The correlation between the returns of both shares is 0.6. The investment committee has finally decided to rebalance their position between these stock by selling `$7` million of JetAero and using the proceeds to buy more of Indigo. Assuming that returns are normally distributed and that the rebalancing does not affect the volatility of the individual stocks, what effect will this have on the 95% 1-day portfolio VaR?

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Last updated: July 5, 2026 at 07:07

The portfolio VaR will remain unchanged

The portfolio VaR will increase by $60,000

The portfolio VaR will decrease by $34,000

The portfolio VaR will increase by $34,000