a. (1 point) Stocks that have experienced very low volatility compared to other

Question

a. (1 point) Stocks that have experienced very low volatility compared to other stocks, say, on a monthly basis for the past five years, are likely to experience volatility in the future.

CIRCLE ONE: LOWER ABOUT THE SAME HIGHER

b. (1 point) Your boss has asked you to calculate the parametric 10-day 99% Value-at-Risk for a $1 million portfolio he created for his mother-in-law. Historically, the portfolio has had a volatility of 32% and an average daily return of 1%. What is the Value-at-Risk, in dollars?

CIRCLE THE ONE OR TWO ANSWERS THAT ARE CLOSEST TO THE CORRECT ANSWER: $1,000 $10,000 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $800,000 $900,000 $1,000,000 (1 point extra credit): What is the exact answer?

c. (1/2 point) You lost a bet and owe your friend $1000 times whatever number they roll on a die. The dice are fresh off the factory and you think they are probably fair dice. What is your 80% Value-at-Risk? Some helpful numbers: 1/6 = 17%, 2/6 = 33%, 3/6 = 50%, 4/6 = 67%, 5/6 = 83%, 6/6 = 100%. Answer:

d. (1/2 point) Same dice question as above. What is your 90% Value-at-Risk? Answer:

e. (1 point) Same dice question as above. You get access to the historical data, namely the past 100,000 rolls of the chosen die. What would be the best methodology to estimate the Value-at Risk now? Circle one: PARAMETRIC NON-PARAMETRIC SAME AS BEFORE

Explanation / Answer

a) LOWER

b) VaR = $1,000,000*(32%*sqrt(10)/sqrt(252))*2.33 = $1,48,257

$100,000 is the nearest answer

c) Var is defined as:

Probability of losing more than VaR < 80%

With the given data:

Probability of losing:

$ 1000 = 17%

<= $ 2000 = 33%

….

<=$4000 <= 67%

<=$ 5000 = 83%

<=$6000 = 100%

So VaR at 80% is $ 4000

d)

For 90% VaR is $ 6000

e)

NON-PARAMETRIC

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