Hi all, Just needed some clarifications on the VaR concept: in Sept 2019 Q1iib) for Option 2, VaR is calculated as: t=0.0488 => VaR = 9,000*(1+0.0488) Referring to Acted Notes Chapt 4 Example on Page 11 and 12: t=-7.68%. As such, can I say that VaR = 200m*(1-7.68%)=184.64m? This is as the notes states that VaR is 15.36m. Or is the VaR in the notes expressed differently i.e in other words, 200m-184.64m=15.36m i.e we will not lose more than 15.36m over the next year? In April 2019 Q8ii, I've calculated VaR as t=meu+sigma *-2.3263 t=-0.45526 VaR=1m*(1-0.45526)= 544,740 Why is the VaR in the examiner's report calculated as £1,010,000 – £544,740 = £465,260? Is this because it is relative to the expected portfolio value of 1.1m? If so, why would it be calculated this way? Thanks in advance for your help!
Further to the first paragraph above, referring to Sept 2018 Q2iii, => t = 0.4954 with VaR = £120,000 * 0.4954 = $59,446. However, the examiner report also mentions that "for £120,000 * (1 – 0.4954) = £60,552 lose one mark". Hence which approach should I take? Referring to Sept 2019 Q1iib) for Option 2, I should take £120,000 * (1 – 0.4954) = £60,552 But referring to Acted Notes Chapt 4 Example on Page 11 and 12, I should take VaR = £120,000 * 0.4954 = $59,446. Am really confused as it seems that the 2019 and 2018 contradicts each other in this respect. Thanks in advance for your help!
Hi The April 2019 question asks for the VaR that is "relative to the expected portfolio value", which is why the £544,740 is deducted from the expected value £1,010,000. The opening probability function P(1,000,000(1+i1)<t)=0.01 is searching for the value of the portfolio at the start of the lower 1% tail. This isn't a loss, it's a portfolio value. To convert this into a loss, the expected value is used as the benchmark. Therefore there's only a 1% chance that the loss (below the expected value) is greater than £465,260. As for the September 2019, the question wording didn't make it clear as to how the VaR should be expressed, ie in absolute terms or relative to some value, eg the mean or a benchmark. So there is some choice here between calculating the VaR of the total fund value in one year’s time or the VaR of monetary return over the year. Both approaches were given full marks. I don't think the comment about losing one mark relates to the interpretation of VaR. Hope that helps.