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Bank of Alaska's stock portfolio has a market value of $10 million. The beta of the portfolio...

Question:

Bank of Alaska's stock portfolio has a market value of $10 million. The beta of the portfolio approximates the market portfolio, whose standard deviation (am) has been estimated at 1.5%.

What is the five-day VAR of this portfolio using adverse rate changes in the 99th percentile?

Value At Risk:

The value at risk is the potential periodic loss to the portfolio with a given probability. The loss depends on the probability required and the standard deviation of the portfolio returns which is a measure of risk.

Answer and Explanation:


The VAR of the portfolio is estimated to be $78,150.58


The standard deviation for One tailed return from the Z Score table is 2.33 Standard Deviations. The VAR can be calculated as:

VAR = Z-Score * SD * Portfolio Value * Sqrt(Days)

From the question, we have the value as:

  • Z-Score = 2.33
  • SD (Standard Deviation) = 1.50%
  • Portfolio Value = $10,000,000
  • Days = 5

We have:

VAR= 2.33 * 0.015 * $10,000,000 * Sqrt(5)
VAR = $78,150.58


Learn more about this topic:

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Investment Risks: Definition & Types

from Finance 305: Risk Management

Chapter 3 / Lesson 3
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