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Statistics Help

**Question: **Suppose that your firm’s portfolio consists of three assets with normally distributed returns. The

first asset has an annual expected return of 12 percent and an annual volatility of 15 percent. The

firm has a long position of $43 million in that asset. The second asset has an annual expected

return of 18 percent and an annual volatility of 27 percent. Your firm has a long position of $100

million in the second asset. The third asset has an annual expected return of 15% and the

volatility of 20%. The firm has a short position of $50 million in that asset. The correlations

between returns on these assets are given in the table below:

ASSET 1 2 3

1 1

2 0.3 1

3 0.27 0.4 1

a. Compute the standard deviation of the firm’s portfolio.

b. Compute its 5 percent annual VaR. Edit

**Answer: **SD= cov(x,y)

=-0.63

0.63*5%

=0.015 Edit

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