30. John Flag, the manager of a USD 150 million distressed bond portfolio, conducts stress tests on the portfolio. The portfolio’s annualized return is 12%, with an annualized return volatility of 25%. In the last two years, the portfolio encountered several days when the daily value change of the portfolio was more than 3 standard deviations. If the portfolio suffered a 4-sigma daily event, which of the following is the best estimate of the change in the value of this portfolio? Assume that there are 250 trading days in a year. [source: FRM 2010 practice exam]

a.  USD 9.48 million
b.  USD 23.70 million
c.  USD 37.50 million
d.  USD 150 million

[my adds]

30.2 Criticize the approach used in the answer; i.e., what unlikely assumption is required? (Please give this careful thought).
30.3 If the returns are normal, what is an estimate for a 95% one-day relative value at risk (VaR).
30.4 If the returns are mean reverting, does the answer given under- or over-state the loss?
30.5 Assume you DO NOT KNOW the underlying distribution of returns. Use Chebyshev’s inequality to produce a 95% one-day relative VaR estimate.
30.6 If the portfolio’s duration is 9.0 years with yield of 8%, what is the portfolio’s daily yield volatility (assume semi-annual compounding)?

Answers:

• Here in forum

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