# Answer to Question #122116 in Finance for lastone

Question #122116
The company has invested $400,000,000 in stocks and$600,000,000 in bonds. Stocks has a standard of 7%, while bonds have 10%. The correlation between stocks and bonds is 0.10. Calculate the portfolio VaR (DEAR) at 99% given mean of 10%.

Calculate the 1-year expected loss of a $100 million portfolio comprising 10 B-rated issuers. Assume that the 1-year probability of default for each issuer is 6% and the average recovery value for each issuer in the event of default is 40%. 1 Expert's answer 2020-06-21T18:26:37-0400 1.Determine the standard deviation of portfolio returns: according to the formula: 0.4, 0.6 - weight in securities portfolio 0.07, 0.1 - standard deviation A confidence level of 99% corresponds to 2.33 standard deviations. According to the formula, we determine the portfolio VaR: Portfolio VaR for a given 'confidence level is determined by the following formula: where VaRP - VaR portfolio; PP - the value of the portfolio; sigma p - standard deviation of portfolio returns corresponding to the time for which VaR is calculated; z a - the number of standard deviations corresponding to the level confidence probability. 2. Calculate expected annual loss Eb - probability of default E(CE) - expected credit exposure E(LDG) - expected severity unexpeted loss: The loss distribution is a random variable with two states: default (loss of$60M, after recovery), and no default (loss of 0). The expectation is \$3.6M. According to the variance formula of the random value

The unexpected loss is therefore

Standard deviation:

Need a fast expert's response?

Submit order

and get a quick answer at the best price

for any assignment or question with DETAILED EXPLANATIONS!