medium · Frm Part 2 Market Risk
A portfolio has a current Value at Risk (VaR_p) of $100 million. A manager wants to add a new position i with a dollar value of $10 million.
If the beta of position i with respect to the portfolio is β_i = 1.2, what is the Marginal VaR (MVaR) of the position and its approximate contribution to Incremental VaR?
- MVaR = 0.83 × VaR_p; the position reduces risk because β_i is relatively low.
- MVaR = $12 million; Incremental VaR = $12 million.
- MVaR = 1.2 × (VaR_p)/(Portfolio Value); Incremental VaR is roughly $1.2 million per $1 million added.
- MVaR cannot be calculated without the specific volatility of position i.
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