MARGINAL VaR

[ABFRM]

In a two-position portfolio consisting of positions X and Y, it is found that the marginal VAR of X is greater than that of Y. Using this information, which of the following is most likely to be TRUE? Increasing the allocation to:
Choose one answer.
a. X and/or reducing the allocation to Y will move the portfolio toward the optimal portfolio
b. Y and/or reducing the allocation to X will lower the VAR of the portfolio,
c. Y and/or reducing the allocation to X will move the portfolio toward the optimal portfolio
d. X and/or reducing the allocation to Y will lower the VAR of the portfolio

.The correct answer is X and/or reducing the allocation to Y will move the portfolio toward the optimal portfolio.

My question is Marginal VAR of A is more than B. So the optimal portfolio will be to reduce the alloation to A and increase allocation to B. So answer B should be the right one.

 

[ABFRM]

anybody can help me on this....

 

[ShaktiRathore]

please refer to the link: http://forum.bionicturtle.com/threads/marginal-var.1365/#post-5001
thanks

 

[ShaktiRathore]

please refer to the link: http://forum.bionicturtle.com/threads/marginal-var.1365/#post-5001
thanks

THe explanation given by David is clear. I would like to add that MVaR=(VaR/P)*Beta where VaR is VaR of portfolio and P is value of portfoilo. and beta is beat of the ith security of portfoilio. According to Q.
MVaR(X)=(VaR/P)*BetaX ...1
MVaR(Y)=(VaR/P)*BetaY ...2
from 1 and 2, MVaR(X)/MVaR(Y)=BetaX /BetaY
since MVaR(X)>MVaR(Y) implies BetaX>BetaY
Now since expected return is given by
E(Ri)=Rf+Betai*(ERm-Rf) implies
E(RX)>E(RY)...3
also MVaR(X)>MVaR(Y) ...4
from 3 and 4,
E(RX)/MVaR(X)>E(RY)/MVaR(Y)
Now since allocation should be more to the asset with more E(R)/MVaR therefore more should be devoted to X the more riskier portfolio.
Hope u understood.
thanks

 

[ABFRM]

ShaktiRathore, thanks for the explanation...