Explanation:
The formula used for calculating Individual VaR is:
Individual VaR = Value Invested × Volatility ×
where for a 95% confidence level.
Value Invested in Asset A: $2,500,000
Volatility of Asset A: 6%
\text{VaR}_A = \`2,500,000 \times 0.06 \times 1.65 = \
Value Invested in Asset B: $1,000,000
Volatility of Asset B: 10%
\text{VaR}_B = \`1,000,000 \times 0.10 \times 1.65 = \
The VaRs for assets A and B are $247,500 and $165,000, respectively.
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Q.4715 James Wit is a portfolio manager at ABC Investment Ltd. His goal is to create a new pool of investments comprising of different assets. Wit begins the investment process by adding two assets A and B in a new portfolio. The assets are perfectly correlated and have a volatility of 6% and 10%, respectively. The amount invested in asset A is $2.5 million, while that invested in B is $1 million. What are the individual VaRs for this portfolio at a 95% confidence level?
A
Asset A VaR: $247,500; Asset B VaR: $165,000
B
Asset A VaR: $412,500; Asset B VaR: $107,692
C
Asset A VaR: $1,269,200; Asset B VaR: $285,500
D
Asset A VaR: $285,500; Asset B VaR: $412,500
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