FRM Part I · FRM Exam Part I · Measures of Financial Risk
Two positions each have a one-day 99% VaR: Position A USD 6 million and Position B USD 8 million. Returns are jointly normal with zero means and a correlation of 0.25. What is the approximate 99% VaR of the combined portfolio?
Combined VaR is about USD 11.1 million.
- AUSD 10.4 millionCorrect
- BUSD 14.0 million
- CUSD 10.0 million
- DUSD 12.2 million
Explanation
Portfolio VaR = sqrt(6^2 + 8^2 + 2 x 0.25 x 6 x 8) = sqrt(36 + 64 + 24) = sqrt(124) = 11.1 million. Recheck: that gives 11.1, not an option, so recompute with 2 x 0.25 x 48 = 24, total 124, root 11.14. Hence the correct choice is none of the earlier values.
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