1) [10 points] From past experience, you know that the dependence in the returns
ID: 3270126 • Letter: 1
Question
1) [10 points] From past experience, you know that the dependence in the returns on two assets
tends to increase when the market takes a down turn (i.e. when both assets end up having quite
large negative returns). However, you have noticed that the dependence does not increase in a
similar fashion when the market does quite well (i.e. when the assets end up having reasonably large positive returns). In other words, the joint behavior of the assets in the lower left tail (both have negative values) is not symmetric relative to the joint behavior in the upper right tail (both have positive values). Do you feel that the correlation between the returns on the two assets would be an appropriate measure of the overall dependence in the two assets?
a) Yes b) No
Please provide a BRIEF (one or two sentences will suffice) justification of your choice. You will
not get ANY credit if you fail to provide an explanation in words
2) [10 points] The monthly arithmetic returns of an exchange rate for each of the last 200
months have been observed and sorted from the lowest values to the highest values. The 10
smallest values in this sorted data set are:
.
A firm has a position of $500,000 in this exchange rate. Compute the 5% VaR for this position
using the above data and the non-parametric approach. Explain your approach BRIEFLY in
a couple of sentences.
Explanation / Answer
1)
a) Yes, Because returns on the two asset dependancy increase when maraket takes a down turn and dependency doesnot increase when market is quite well. Means asset depends on each other that means change in one of the asset cause to vary other asel. Therefore they are correlated to each other.
Please provide data for question 2) to get the answer and paste similar question again.
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