Hello everyone,
I need some help on understanding why perfect correlation makes a part of the equation for portfolio VaR disappear. I've tried the calculations and the answers come out the same but I don't understand why.
How do we get from: VaRp = sqrt(VaR1^2+VaR2^2+2VaR1VaR2)
to
VaRp = VaR1+VaR2
I don't understand how the 2VaR1VaR2 cancels out.
Thanks,
Mathematically challenged FRM test taker
I need some help on understanding why perfect correlation makes a part of the equation for portfolio VaR disappear. I've tried the calculations and the answers come out the same but I don't understand why.
How do we get from: VaRp = sqrt(VaR1^2+VaR2^2+2VaR1VaR2)
to
VaRp = VaR1+VaR2
I don't understand how the 2VaR1VaR2 cancels out.
Thanks,
Mathematically challenged FRM test taker