• 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.

Value at Risk Q&A Bank Q 3.6 (iii)

K

kylie jane

Member
Can someone help me out with the reasoning behind the solution:

Question: "Assuming a normal distribution, calcualte the VAR:
The 95% VAR for an investor with a $10m portfolio where the average annual return is 6% and there is a 5% chance that the value of the portfolio will fall by more than 10% over a year."

In the solution we have VAR = (0.06--0.1)*10m = 1.6m

I don't quite understand why... I get that if we ignore any return we have VAR_0.95 = 0.1*10m

I feel like I'm missing something really basic here! Any help would be great :)
 
In this case we are measuring the VaR relative to what we would expect our portfolio to grow to.

So, 5% chance of portfolio falling to $9m. We expect portfolio to grow to $10.6m. So VaR = $1.6m.
 
I think I'm convinced! In terms of the "formula" is this correct?

Var_0.95 = mu+ sigma*phi^-1(0.95)

mu = 10*0.06 =0.6
and from the question sigma*phi^-1(0.95) = 0.1*10 = 1
(i.e. we are assuming the loss is distributed N(0,sigma))

and Var_0.95 = 0.6+1 = 1.6
 
You must log in or register to reply here.
Back
Top