Concept Checker Answers

1. C Portfolio VAR should include the effects of diversification. None of the other answers are types of VARs.

2. A The expression for individual VAR is VARj = Zc x g x | Pj | = Z x <x x |wj x P. The absolute value signs indicate that we need to measure the risk of both positive and negative positions, and risk cannot be negative.

3. C For uncorrelated positions, the answer is the square-root of the sum of the squared VARs:

4. D Full revaluation means recalculating the VAR of the entire portfolio. The marginal VARs are probably already known, so using them is probably less costly, but will not be as accurate.

5. A The expected excess return ratios for X and Y are 1.5 and 1.6, respectively. Therefore, the portfolio weight in Y should increase to move the portfolio toward the optimal portfolio.

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The following is a review of the Risk Management and Investment Management principles designed to address the AIM statements set forth by GARP®. This topic is also covered in:

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