CMA Final · Strategic Financial Management · Risks in Financial Market
A portfolio has a one-day 99% VaR of Rs 20 lakh. Assuming returns are independent and identically distributed and normal, the 10-day 99% VaR using the square-root-of-time rule is closest to:
The 10-day VaR is about Rs 63.2 lakh. Under independent, normally distributed returns, risk scales with the square root of time, so Rs 20 lakh multiplied by the square root of 10 (3.162) gives Rs 63.2 lakh, not Rs 2 crore.
- ARs 2.00 crore
- BRs 63.2 lakhCorrect
- CRs 20 lakh
- DRs 6.32 lakh
Explanation
10-day VaR = 20 x sqrt(10) = 20 x 3.162 = Rs 63.2 lakh. Rs 2 crore multiplies by 10, wrongly scaling linearly.
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