Topic Test: Babb Partners case, Asset Allocation and related decisions in PM (2)

CFA Level III Portfolio Management
#1

Fund return: -25 %, -20 %, -12%, -8%, -2%, 0 %, 6 %, 9 %

Probability: 0.005, 0.02, 0.025, 0.15, 0.2, 0.25, 0.25, 0.1

Mean fund return : 1.53 % annually

Fund return volatility: 6.47 annually

Fund value: USD 110 mln

Q: the VaR at the 5 % level is calculated as…

a) USD 13.2

b) USD 22.0

c) USD 12.0

My calculation was 0.0153 - (1.65 x 0.0647) = -0.091455, then -0.091455 x 110 mln = 10,06 mln. Correct answer is simply 0.12 % x 110 mln= 13.2 mln. Why are we not using the first equation? Is it because we are not being asked to calculate the yearly VaR?

#2

analytical VAR method vs. Historical VAR method.

You used Analytical - bcos they gave you the Prob and fund % - they used the Historical VAR method.

#3

Thank you!