CMA Final · Strategic Performance Management and Business Valuation · Corporate Risk Management Performance
A portfolio has a one-day 99% Value at Risk (VaR) of Rs 4,00,000. Assuming returns are independent and normally distributed with zero mean, and using the square-root-of-time rule, what is the approximate 16-day 99% VaR?
The 16-day VaR is about Rs 16,00,000. Under the square-root-of-time rule the one-day VaR of Rs 4,00,000 is multiplied by the square root of 16, which is 4. Scaling linearly by 16 would overstate the risk.
- ARs 16,00,000Correct
- BRs 64,00,000
- CRs 1,00,000
- DRs 6,40,000
Explanation
Scaling by the square root of time: 4,00,000 x sqrt(16) = 4,00,000 x 4 = Rs 16,00,000. Multiplying by 16 (Rs 64,00,000) wrongly scales linearly; dividing by 4 gives Rs 1,00,000, which is the wrong direction.
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