Hello, In question 4.11 of the notes, it poses the following distribution of returns X P -7 0.04 5.5 0.96 It says the 95% VAR is 5.5, since P(X< -7)=0 and P(X< 5.5) = 0.04. Hence VAR=5.5 However, in a near identical question in S2012 exams, Q1, It has X P 0 0.018 106 0.982 It says the 95% VAR is 0. But these questions are virtually identical. The definition of discrete VAR in core reading is VaR(X) = -t, t=max(x : P(X<x) <= p So going by the definition, the first question is correct. But to me, the exam question 'feels' more correct. Kind regards, Nick
They are both correct, as intuitively the VaR always just corresponds to the 5%/95% lower tail value of the distribution of investment returns. In the first case, this corresponds to a return of 5.5% and hence a VaR equal to -5.5% * 100m = -£5.5m compared to the initial investment. In the second case, it corresponds to £106, ie getting all of your money back, which can be interpreted as a VaR of -£6m compared to the initial investment. However, there are also other possible ways of expressing the VaR here, as shown in the attached extract from the CT8 ASET.
Aaaaahhhhhh!! I geddit! I missed the part saying it could be measure relative to various benchmarks - and consequently those two questions completely threw me. Thanks a lot, Graham. Nick
