FRM Part II · FRM Exam Part II · VaR Mapping
A portfolio holds USD 10 million of stock A with beta 1.2 and USD 5 million of stock B with beta 0.8. The market index has annual volatility of 20%. Ignoring specific risk, what is the one-year 95% VaR (z = 1.645) of the portfolio?
Beta-adjusted exposure is USD 16 million; at 20% volatility that is USD 3.2 million, and multiplying by 1.645 gives a VaR of about USD 5.26 million.
- AUSD 5.26 millionCorrect
- BUSD 3.29 million
- CUSD 4.93 million
- DUSD 6.58 million
Explanation
Beta-weighted exposure = 10×1.2 + 5×0.8 = 16 million. Volatility = 16 × 0.20 = 3.2 million. VaR = 1.645 × 3.2 = 5.264 million. Using unweighted 15 million would give 4.93 million, which ignores the betas.
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