The expected rate of return of A stock is 30% and the standard deviation of...
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The expected rate of return of A stock is 30% and the standard deviation of the returns is 22%, while the expected rate of return of B stock is 18% and the standard deviation of the returns is 15%. The correlation between the returns of A and B shares is 0.40 and the risk-free rate of return of T-bills is 3%. The FTSE100 index has a rate of return of 15% during the same period. Part A). Calculate the expected return and standard deviation of an equally-weighted portfolio containing stocks A and B. (5 marks) Part B). A risk manager assumes that the joint distribution of returns is multivariate normal and calculates the following risk measures for a two-asset portfolio: Asset Position Individual VaR Marginal VaR Component Var A 100 -23.3 -0.176 -17.6 B 100 -46.6 -0.44 -44 Portfolio 200 -61.6 -61.6 If asset B is dropped from the portfolio, what is the reduction in portfolio Value at Risk (VaR)? (5 marks) Part C). What are Ba and BB relative to the portfolio? 15 marks)
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