Portfolio VaR with perfect correlation.

[Mathrio]

Hello everyone,

I need some help on understanding why perfect correlation makes a part of the equation for portfolio VaR disappear. I've tried the calculations and the answers come out the same but I don't understand why.

How do we get from: VaRp = sqrt(VaR1^2+VaR2^2+2VaR1VaR2)

to

VaRp = VaR1+VaR2

I don't understand how the 2VaR1VaR2 cancels out.

Thanks,

Mathematically challenged FRM test taker

 

[David Harper CFA FRM]

Hi @Mathrio

Maybe see http://en.wikipedia.org/wiki/Completing_the_square
It's just: a^2 + b^2 + 2ab = (a+b)^2, such that if a =VaR1 and b=VaR2
VaR1^2 + VaR2^2 + 2*VaR1*VaR2 = (VaR1 + VaR2)^2, and we are taking the square root of that. I hope that explains,

 

[Mathrio]

Thank you so much David for the quick response!