CAS Exam 9 Spring 2015, Question 2
Study guide: Exam 9
Given the following information about the universe of available risky securities:
- Annual stock returns are identically normally distributed.
- The expected annual return for each stock is 12%.
- The standard deviation for each stock is 40%.
- The correlation coefficient between annual returns of any pair of stocks is 0.35.
- An equally weighted risky portfolio of 30 stocks has a total value of $10 million.
Part a (0.5 points)
Calculate the minimum number of stocks necessary for the standard deviation of a portfolio composed of the stocks specified above to be less than or equal to 24%.
Part b (1.5 points)
The given portfolio of 30 stocks is diversified such that only systematic risk remains. Calculate the amount, in dollars, of the 90% 1-year Value at Risk (VaR) that has been eliminated.
No current syllabus covers this question; it is kept for the record.
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