Question

Consider a position consisting of a $$\$ 300,000$$ investment in gold and a $$\$ 500,000$$ investment in silver. Suppose that the daily volatilities of these two assets are $1.8 \%$ and $1.2 \%$, respectively, and that the coefficient of correlation between their returns is 0.6 . What is the 10-day $97.5 \% \mathrm{VaR}$ and ES for the portfolio? By how much does diversification reduce the $\mathrm{VaR}$ ? Assume normally distributed returns.

   Consider a position consisting of a $$\$ 300,000$$ investment in gold and a $$\$ 500,000$$ investment in silver. Suppose that the daily volatilities of these two assets are $1.8 \%$ and $1.2 \%$, respectively, and that the coefficient of correlation between their returns is 0.6 . What is the 10-day $97.5 \% \mathrm{VaR}$ and ES for the portfolio? By how much does diversification reduce the $\mathrm{VaR}$ ? Assume normally distributed returns.
 
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Options, Futures, and Other Derivatives
Options, Futures, and Other Derivatives
John C. Hull 10th Edition
Chapter 22, Problem 17 ↓

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The daily volatility of the portfolio can be calculated using the formula for the weighted average volatility: $$\text{Portfolio Volatility} = \sqrt{w_1^2 \times \text{Volatility}_1^2 + w_2^2 \times \text{Volatility}_2^2 + 2 \times w_1 \times w_2 \times  Show more…

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Consider a position consisting of a $$\$ 300,000$$ investment in gold and a $$\$ 500,000$$ investment in silver. Suppose that the daily volatilities of these two assets are $1.8 \%$ and $1.2 \%$, respectively, and that the coefficient of correlation between their returns is 0.6 . What is the 10-day $97.5 \% \mathrm{VaR}$ and ES for the portfolio? By how much does diversification reduce the $\mathrm{VaR}$ ? Assume normally distributed returns.
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