Q1B.
Expert-verifiedSuppose you’ve estimated that the fifth-percentile value at risk of a portfolio is -30%. Now you wish to estimate the portfolio’s first-percentile VaR (the value below which lie 1% of the returns). Will the 1% VaR be greater or less than -30%?
1% VaR will be less than -30%.
Fifth-percentile VaR of a portfolio = -30%
VaR or “Value at Risk” is the measure of downside risk.
In the above scenario, since the percentile or probability of a return has declined, the magnitude of that return will also decline. Thus, a 1 percentile probability will produce a smaller VaR than a 5 percentile probability. Therefore 1% VaR will be less than -30%.
If the simple CAPM is valid, which of the situations in Problems 13 – 19 below are possible? Explain. Consider each situation independently.
Portfolio | Expected Return | Standard Deviation |
A B | 30% 40 | 35% 25 |
94% of StudySmarter users get better grades.
Sign up for free