marginal var

bks.gtb
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marginal var

Postby bks.gtb » Sat May 12, 2012 12:58 pm

In a two-position portfolio consisting of positions X and Y, it is found that the marginal VAR of X is greater than that of Y. Using this information, which of the following is most likely to be TRUE? Increasing the allocation to:
Choose one answer. a. X and/or reducing the allocation to Y will move the portfolio toward the optimal portfolio
b. Y and/or reducing the allocation to X will lower the VAR of the portfolio,
c. Y and/or reducing the allocation to X will move the portfolio toward the optimal portfolio
d. X and/or reducing the allocation to Y will lower the VAR of the portfolio

.The correct answer is X and/or reducing the allocation to Y will move the portfolio toward the optimal portfolio.

My question is Marginal VAR of A is more than B. So the optimal portfolio will be to reduce the alloation to A and increase allocation to B. So answer B should be the right one. Please clarify.

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suresh.wadhwani2009
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Re: marginal var

Postby suresh.wadhwani2009 » Mon May 14, 2012 4:48 pm

I have the same doubt.

Pristine team,

Waiting for revert.

content.pristine
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Re: marginal var

Postby content.pristine » Mon May 14, 2012 10:10 pm

One of our instructor, Kiranprasad, gives the response:

"The way to tackle many of the portfolio VAR related questions is to intuitively extend the understanding on the Standard deviation related properties. (VAR can be viewed a more sophisticated measure of associating a quantitative figure to an asset/ portfolio).

I agree with According to me, the answer is option 2. Unless there is a typo in the answer key, I do not see any reason why option d is correct!Yes, the understanding is correct that allocation to Y and/or reducing allocation to X will lower the VAR of the Portfolio.

Now, a teaser: Can you tell me why can't we comment of the optimal nature of the portfolio here?/ (I mean why cant option C?). Ponder on it."

suresh.wadhwani2009
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Re: marginal var

Postby suresh.wadhwani2009 » Tue May 15, 2012 12:01 am

Dear Kiran,

In optimal portfolio, investor try to minimize risk while striving for the highest return. By trial and error method (different different weights to X and Y) we come up with various portfolios with diff risk-return characteristics. Optimal portfolio is the one which gives the highest return at given risk (investor's level of risk, which he has assumed).

In this qn, we cant comment on the optimal nature of the portfolio as it is only talking about increasing allocation or reducing allocation. We don't know at which point (diff weights to X and Y) portfolio will be optimal.

So we can only say that increasing allocation to Y will lower the VaR of the portfolio.

Help me if, If m wrong. :|

jaspreet.frm
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Re: marginal var

Postby jaspreet.frm » Tue May 15, 2012 12:05 pm

The minimum risk portfolio is that where all the marginal VARs are equal. If Y has a lower marginal VAR, increasing the allocation to that position will increase its marginal VAR relative to that of X. Without returns measures, we cannot know how changing the allocations will move the portfolio with respect to the optimal portfolio. Therefore Option B is correct instead of Option A.


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