Apparently the combined VAR of the two desks will be less than 20m if the equity desk creates 10m of VAR and the bond 10m of var. I get that in the majority of cases but assuming 0 correlation, this wouldn’t be true.
Another option which was apparently wrong states “FI desk return on capital is greater than Equity ROC”
FI monthly profit 15, capital 100
Eqy monthly profit 25 capital 200
FI ROC is greater than Equity…why isn’t this correct??
The only time the VAR will be the sum of both the VARs is when correleation=1. BEcause then there are no diversification benefits between the two portfolio.
All other cases will yield SOME diversification and result in VAR being lower than the sumof the compoinent parts.
Q2, not sure, seems like teh statement is right to me.
Why daily VAR 10 million for both Equity and Fixed Income DOES NOT imply same risk budget allocation (alternative A)? Can someone explain? Thanks.
You have to calculate return on var