i can't understand value at risk for both the investors.any bit of explaination will be appreciated! thanks
Can you be more specific? Your post is not a million miles away from "Please teach me the course material from scratch" What have you done so far on this question? Where did you get stuck? John
two things here: 1. is value at risk a loss at given level of confidence with reference to some intial or target wealth (as defined in material) which is in this case seems 1000 or is it the value of fund after deducting that loss(as done in few recent exams sol)? I am getting confused with which way to use. 2. for second investor they have used normal approximation but with percentile point of 95% rather than 5% which i dont understand? Thanks in advance
I think both of these points are points of possible ambiguity, as has been witnessed in past papers. My advice would be to do something sensible and make it extremely clear what you are doing. So, if I had a question asking for VaR 5% or VAR 95%, I would basically assume this is the same question and one of them is worded "badly". I would work out the bottom 5% of the distribution and say something like "So, the VaR is ........ i.e. the 5th worst outcome out of 100 outcomes. Note that I have quoted my VaR relative to a return of 0%. i.e. it is the absolute loss in the 5th worst outcome out of 100 outcomes". Unless the exam question has stated "YOU MUST QUOTE VAR RELATIVE TO THE MEAN", my answer must get full marks because it is a perfectly sensible interpretation of the question and it is consistent with the definition of VaR given in the notes. If the question was worded in a way that made me think that maybe they meant relative to the mean, I would give both answers, again making very clear what my 2 answers meant - this way I cover myself in the exam no matter where the roulette wheel inside the question setter's head lands! To be fair to the Examiners on VaR, it is a term that is also used ambiguously in real life, Good luck! John
