BT Question 34 of practice questions 2008 Investment

[notjusttp]

Assume a two-asset portfolio with a portfolio value of $20 million. Each asset weighs 50% of the portfolio. Asset A has a volatility of 10% and asset B has a volatility of 20%. If the desired confidence is 99%, what is the portfolio VaR if (i) the assets are uncorrelated [i.e.., correlation = 0] and (ii) the assets are perfectly correlated [i.e., correlation = -1]

David My doubt is about the term "Perfect correlation" as used by you. Does perfect correlation means -1 or +1?You say its -1 then what is +1 called as?

Thanks & best rgds
Amit

 

[David Harper CFA FRM]

Hi Amit,

The question has a typo, it should read: "the assets are perfectly correlated [i.e., correlation = +1]"
...as reflected in the answer, where the VaRs are simply added

if correlation = -1.0, we'd typically say "perfect negative correlation"

so, you are right to be confused by the typo: perfect correlation implies +1.0

thanks, David

 

[notjusttp]

Hi David,

thanks for this too..i like the promptness with which my doubts gets answered...Rgds..Amit