Final answer:
The Value at Risk benefit of diversification is calculated by subtracting the portfolio VaR from the sum of individual VaRs of the assets. For IBM and AT&T, the VaR benefit of diversification is $90,747. This indicates a reduction in risk due to diversification.
Step-by-step explanation:
Value at Risk (VaR) is a statistical measure used to assess the potential loss in value of a risky asset or portfolio over a specific time period, under normal market conditions. To calculate the VaR benefit of diversification, one would subtract the portfolio VaR of the combined assets (IBM & AT&T) from the sum of the individual VaRs of IBM and AT&T.
Here is the calculation based on the given data:
- IBM's VaR = $1,473,621
- AT&T's VaR = $368,405
- Portfolio VaR of IBM & AT&T = $1,751,279
The sum of the individual VaRs of IBM and AT&T is $1,473,621 + $368,405 = $1,842,026.
The VaR benefit of diversification would be:
Sum of Individual VaRs - Portfolio VaR = $1,842,026 - $1,751,279 = $90,747.
The VaR benefit of $90,747 represents the reduction in potential risk by diversifying between IBM and AT&T.