April 2021 Q1 iii) b - VaR

[sophieactrainee]

I am getting confused in this question by how the Value at Risk is 800-730 = 70

I thought we are looking for the smallest payoff such that the probability of anything worse occurring is less than or equal to 0.5%.

We know that P(Y < 750) = 0.518% > 0.5%, and P(Y < 730) = 0 (as the distribution only has 3 values and can't be less than 730).

So therefore isn't the VaR not just 730? What's with the 800-730? Sorry but I am very confused

Any help would be appreciated

 

[John Potter]

VaR is often ambiguously treated but we're always looking (5%) for how much we lose if the 5th worst thing out of 100 outcomes happens. Or, in this case, the 5th worst thing out of 1,000 outcomes (since 0.5%). The investor starts with $800. So, if the final outcome is 730, they lose 70

Good luck!
John

 

[sophieactrainee]

Thanks for explaining