Hi David,
I have a past practice exam, 2017 and the solution for question 17 is causing some confusion. Please let me know if correct or if I am missing something.
Question 17
A portfolio manager is interested in acquiring Stock GIL as part of an existing portfolio. However the manager is concerned about the level of liquidity risk and proceeds to estimate liquidity adjusted VAR for the stock. The manager observes a quote for Stock GIL and reports the mid point of its current best bid and best ask price as AUD 66. Stock GIL has an estimated daily vol of 0.27% and average bid-ask spread of AUD 0.18. Using the constant spread method on a 30,000 share position and assuming the returns of Stock GIL are normally distributed, what is the correct estimate for the liquidity adjusted 1-day 99% VAR?
I have posted a picture of the answer. In the calc of VAR, the multiple the mean by the z-score and vol instead of adding the product of the Z-score and vol to the mean. I dont understand why? Please have a look and let me know?
I have a past practice exam, 2017 and the solution for question 17 is causing some confusion. Please let me know if correct or if I am missing something.
Question 17
A portfolio manager is interested in acquiring Stock GIL as part of an existing portfolio. However the manager is concerned about the level of liquidity risk and proceeds to estimate liquidity adjusted VAR for the stock. The manager observes a quote for Stock GIL and reports the mid point of its current best bid and best ask price as AUD 66. Stock GIL has an estimated daily vol of 0.27% and average bid-ask spread of AUD 0.18. Using the constant spread method on a 30,000 share position and assuming the returns of Stock GIL are normally distributed, what is the correct estimate for the liquidity adjusted 1-day 99% VAR?
I have posted a picture of the answer. In the calc of VAR, the multiple the mean by the z-score and vol instead of adding the product of the Z-score and vol to the mean. I dont understand why? Please have a look and let me know?
