Consider a portfolio comprising of a $3 million investment in Ariel Ltd and a $5 million investment in in Snowy Ltd. Assume that the standard deviations of the returns for the shares are 0.4 and 0.25 respectively. Assume also that the correlation between the returns on the shares in these companies is 0.7. Assume a 4% chance of abnormally bad market conditions and that returns follow a normal probability distribution.

Required:

a. Explain the 'Value at Risk' (VaR) approach to examining risk

b. Calculate the value at risk of each individual investment and then of the portfolio.

c. Calculate the value of risk for the portfolio if the correlation between investments increases to .85

d. Calculate the value of risk for the portfolio if the correlation between investments increases to 1

e. Calculate the value of risk for the portfolio if the correlation between investments decreases to .55

f. Discuss your findings

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