1. Lecture 24

3. Example Correlation Coefficient =.4 Stocks  % of PortfolioAvg Return ABC Corp2860% 15% Big Corp42 40% 21% Standard Deviation = weighted avg = 33.6 Standard Deviation = Portfolio = 28.1 Additive Standard Deviation (common sense): = 28 (60%) + 42 (40%) = 33.6 WRONG Real Standard Deviation: = (28 2) (.6 2 ) + (42 2 )(.4 2 ) + 2(.4)(.6)(28)(42)(.4) = 28.1 CORRECT

4. Value at Risk = VaR Newer term Attempts to measure risk Risk defined as potential loss Limited use to risk managers Factors Asset value Daily Volatility Days Confidence interval

5. Standard Measurements 10 days 99% confidence interval VaR

6. Example You own a $10 mil portfolio of IBM stock. IBM has a daily volatility of 2%. Calculate the VaR over a 10 day time period at a 99% confidence level.

7. Example You also own $5 mil of AT&T, with a daily volatility of 1%. AT&T and IBM have a.7 correlation coefficient. What is the VaR of AT&T and the combined portfolio?