Explanation:
The percentage contribution of the component VaRs to the portfolio VaR can be approximated using the asset weights and their betas, assuming systematic risk dominates.
First, determine the portfolio weights:
Total Portfolio Value = \`2.5 \text{ million} + \1` \text{ million} = \`3.5\text{ million}$. Weight of A ($w_A$) =
Weight of B () = $1.0 / 3.5 = 0.2857$
Next, calculate the Portfolio Beta ():
Finally, calculate the percentage contribution of each asset: Contribution of A = Contribution of B =
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Q.30 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 into a new portfolio. Assume that the idiosyncratic components of the assets are uncorrelated and that the assets 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. Additionally, the asset betas are 0.97 and 1.075 respectively. Calculate the percentage contribution of the component VaRs of both assets to the portfolio VaR at the 95% confidence level.
A
[28.7% 71.3%]
B
[86.2% 13.8%]
C
[81.6% 18.6%]
D
[69.3% 30.7%]
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