Question

Now use the following data set for the same common stock, which presents the adjusted close prices. Compute the total daily return (holding period return) from Feb 6 to Feb 7 as shown below. Enter the daily return as a percentage with two decimal places. Dividend Daily Return Date Feb 6, 2019 Feb 7, 2019 Feb 8, 2019 Adjusted Close Price 72.00 71.38 0.77 71.51 Suppose you make a $100,000 investment in this common stock. Based on the historic monthly return data, this common stock has a 5% Value at Risk equal to -6.1%. What would you conclude from the 5% Value at Risk? Enter the number of the correct answer : 1- There is 5% probability that you could lose more than $6,100 of your investment over a month. 2- There is 5% probability that you could lose less than $6,100 of your investment over a month. 3- There is 5% probability that you could lose exactly $6,100 of your investment over a month. 4- If the monthly return on this stock turns out at the bottom 5% of the historic monthly return distribution, you are most likely to lose more than $6,100 of your investment over a month. 5- If the monthly return on this stock turns out at the bottom 5% of the historic monthly return distribution, you are most likely to lose less than $6,100 of your investment over a month. 6- If the monthly return on this stock turns out at the bottom 5% of the historic monthly return distribution, you are most likely to lose exactly $6,100 of your investment over a month.

Answer 1

Total Daily Return = (Final Adjusted price- Initial Adjusted price+ Dividend)/Initial Adjusted price

=(71.38-72+0.77)/72

=0.002083 or 0.21%

5% value at Risk of -6.1% means that there is a 5% probability that the portfolio could lose more than 6.1% i.e. $6100 (Option 1 is correct)