Module: | MODULE B: RISK MANAGEMENT
Q352: A bank holds two distinct asset portfolios, A and
✅ Correct Answer: A
The correct answer is A (₹ 7.00 Crore). Under the Variance-Covariance (Parametric) VaR method, the combined VaR of two portfolios depends on their correlation.
The formula is: the square root of (VaR A squared + VaR B squared + 2 * rho * VaR A * VaR B). When the correlation coefficient (rho) is exactly positive 1.0, the formula mathematically simplifies to a direct algebraic sum: VaR A + VaR B. Therefore, 4 + 3 = ₹ 7 Crore.
There is absolutely no diversification benefit when assets are perfectly positively correlated.
Option B (₹ 5 Crore) would be correct only if the correlation was exactly 0 (using the Pythagorean theorem, the square root of (4 squared + 3 squared) = 5). Option C (₹ 1 Crore) would be correct if the correlation was perfectly negative (-1.0). Option D is mathematically absurd.
The formula is: the square root of (VaR A squared + VaR B squared + 2 * rho * VaR A * VaR B). When the correlation coefficient (rho) is exactly positive 1.0, the formula mathematically simplifies to a direct algebraic sum: VaR A + VaR B. Therefore, 4 + 3 = ₹ 7 Crore.
There is absolutely no diversification benefit when assets are perfectly positively correlated.
Option B (₹ 5 Crore) would be correct only if the correlation was exactly 0 (using the Pythagorean theorem, the square root of (4 squared + 3 squared) = 5). Option C (₹ 1 Crore) would be correct if the correlation was perfectly negative (-1.0). Option D is mathematically absurd.