(Answered) Calculate the diversification benefit

Management Studies

A bank invests 13 million in a stock fund and 7 million in a bond fund. Use the following information.

The volatility of the stock fund is 35% per annum

The volatility of the bond fund is 20% per annum

The correlation between the stock fund and bond fund is -0.6

Assume that the VaR follows the normal distribution.

1. Calculate 10-day 97% VaR of the portfolio.

2. Calculate the diversification benefit.

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