• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

Risk budgeting and Value At Risk

B

Batsirai Kapembeza

Member
Hello, may someone please kindly explain how VAR is used to determine the total risk budget when doing the risk budgeting process. It's part of step 2 in the risk budgeting process and I'm finding it hard to understand how VAR is actually used in terms of determining the total risk budget. Thanks.
 
Hi Batsirai

I suspect a wide range of approaches are possible here. But in essence, risk budgeting allows you to to take a holistic view of risk ie determine the overall level of risk you want to take, and then decide where to take it.

VaR could be used as the measure of risk. Eg you might decide that the maximum level of risk you are prepared to take (your total risk budget) is such that there is a 95% chance that, over the next year, the value of your assets will fall by no more than £2m.

You could then split this total risk budget between strategic risk and active risk and again use VaR to assess the riskiness of different investment strategies and investment managers to identify a strategy and set of managers that remains within your risk budget

Hope that helps

Gresham
 
You must log in or register to reply here.
Back
Top