A suppose that the daily change in the value of a portfolio, Ask an Expert

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a. Suppose that the daily change in the value of a portfolio is, to a good approximation, linearly dependent on two factors, calculated from a principal components analysis. The delta of a portfolio with respect to the first factor is 6 and the delta with respect to the second factor is -4. The standard deviations of the factor are 20 and 8, respectively. What is the 5-day 90% VaR?

b. Suppose that a company has a portfolio consisting of positions in stocks, bonds, foreign exchange, and commodities. Assume that there are no derivatives. Explain the assumptions underlying (a) the linear model and (b) the historical simulation model for calculating VaR.

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Financial Management, Finance

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