Explanation:
The correct answer is C.
Under normal distribution assumption:
For a confidence level of 99%, the Z value will be 2.33.
The VaR can be calculated as:
In dollar terms, this will be $432,500.
Under the lognormal distribution assumption:
In dollar terms, this will be $351,000.
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Q.2636 Jacob Watson is a risk manager for a large bank. Presently, he is estimating the VaR for the equities portfolio of the bank. He is considering estimating the VaR using normal and lognormal distribution assumptions. He has gathered the following information about the portfolio:
| Value of the portfolio | USD 1 million |
|---|---|
| Mean | 15% |
| Volatility | 25% |
What would be the 1-year 99% VaR for the portfolio under the two assumptions?
A
Normal distribution: $495,000; Lognormal distribution: $460,000.
B
Normal distribution: $460,000; Lognormal distribution: $495,000.
C
Normal distribution: $432,500; Lognormal distribution: $351,000.
D
Normal distribution: $499,000; Lognormal distribution: $432,500.
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