Consider the Following Discrete Probability Distributions of Payoffs for 3

question 60

Multiple Choice

Consider the following discrete probability distributions of payoffs for 3 securities that are held in a DI's trading portfolio (payoff amounts shown are in $millions) :

$\begin{array} { lcc } \text { SECURITY } & \text { PROBABILITY } & \text { PAYOFF } \\\text { Alpha } & 0.50 & 355 \\& 0.49 & 150 \\& 0.01 & - 300\end{array}$ $\begin{array} { lcc } \text { SECURITY } & \text { PROBABILITY } & \text { PAYOFF } \\\text {Beta } & 0.50 & 1500 \\& 0.49 & - 300 \\& 0.0025 & - 3,300\end{array}$ $\begin{array} { lcc } \text { SECURITY } & \text { PROBABILITY } & \text { PAYOFF } \\\text {Gamma } & 0.49 &400 \\&0.49&150 \\&0.01 &-150 \\&0.01&-2,000\end{array}$

What is the one-day,99% confidence level,value at risk (VAR) of securities Alpha and Beta,respectively (in millions) ?

• A)$3 and $25.50
• B)$3 and $0.75
• C)$248 and 248
• D)$300 and $300

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Definitions:

Efficient

The ability to achieve a desired result without wasted energy or effort.

Optimal Portfolio

Optimal Portfolio is an investment portfolio that offers the highest expected return for a specific level of risk or the lowest risk for a given level of expected return.

Diversifiable Risk

A type of risk that can be reduced or mitigated through diversification or spreading investments across different assets to reduce exposure to any single risk.

Market Risk

The potential for financial loss due to fluctuations in market conditions, such as changes in stock prices, interest rates, or exchange rates.