Question

17.KMR Investment is estimating a one-day VaR for its portfolio currently valued at $800 million. Using returns for the past 400 days (ordered in decreasing order, from highest daily return to lowest daily return), the daily returns are the following: 1.99%, 1.89%, 1.88%, 1.87%, . . . , -1.76%, -1.82%, -1.84%, -1.87%, -1.91%. What is the one-day 99% VaR under the historical simulation method?

$14.08 million

$14.56 million

$14.72 million

$15.04 million

18.Due to convexity, when interest rates change, the actual bond price will ________ the bond price predicted by duration.

sometimes be higher than

always be lower than

always be higher than

sometimes be lower than

19.A 6% coupon, 12-year corporate bond is priced to yield 8%. The Macaulay duration for this bond is 8.59 years. Given this information, what is the bond's modified duration?

7.954

8.000

8.104

9.278

20.Which of the following is correct? Choose all that are correct.

Under the historical simulation approach, a short dataset leads to more precise estimation of VaR.

Historical simulation does not need any assumption about the distribution of the risk factors.

The historical simulation method easily accommodates market structure changes such as the introduction of a new currency.

Including market crash data in the historical simulation process may distort VaR estimates.

21.Which of the following statements about stress testing are true?

I. Stress testing can complement VaR estimation in helping risk managers identify how vulnerable a portfolio might be to a variety of extreme events.

II. Stress tests cannot be used in VaR estimates.

III. Random combinations of stress shocks could be inconsistent with the basic laws of economics.

IV. The inclusion of a large number of scenarios helps management better understand the risk exposure of a portfolio.

I and III only

II and IV only

I, III, and IV only

I, II, III, and IV

Answer 1

17. 99% of 400 = 396
396+1=397
397th from above means 3rd from below:  1.84% of $800million = $14.72 million (3rd option)

18. Due to convexity, when interest rates change, the actual bond price will always be higher than the bond price predicted by duration.
Positive convexity leads to greater increases in bond prices.

I can only answer 1 question at a time but i am solving 2 questions here.
Please do rate me and mention doubts, if any, in the comments section.