Explanation:

The Component VaR (CVaR) for stock T can be calculated as the position size of stock T multiplied by its Marginal VaR.

Marginal VaR of T = $Z \times \rho_{T,P} \times \sigma_T$ Assuming a 95% confidence level, the z-score is $1.645$.
Marginal VaR = $1.645 \times 0.45 \times 0.13 \approx 0.09623$
Component VaR = Position Size $\times$ Marginal VaR = CAD 15 million $\times 0.09623 \approx$ CAD 1.44349 million. Rounded to three decimal places, this is approximately CAD 1.444 million.

Question A risk manager is evaluating the risks of a portfolio of stocks. Currently, the portfolio is valued at CAD 248 million and contains CAD 15 million in stock T. The annualized standard deviations of returns of the overall portfolio and of stock T are 16% and 13%, respectively. The correlation of returns between the portfolio and stock T is 0.45. Assuming the risk analyst uses a 1-year 95% VaR and the returns are normally distributed, what is the component VaR of stock T?

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Last updated: July 5, 2026 at 07:28

CAD 0.096 million

CAD 1.444 million

CAD 2.041 million

CAD 3.948 million

Financial Risk Manager Part 2