CMA Final · Strategic Financial Management · Risks in Financial Market
A portfolio has a standard deviation of daily returns of 1.5% and value of Rs 4,00,00,000. Using z = 1.65 for 95% confidence, what is the 4-day VaR, assuming returns are independent and identically distributed?
The 4-day VaR is Rs 19,80,000. The one-day VaR of Rs 9,90,000 is scaled by the square root of the number of days, which is 2, because independent daily returns make variance additive; scaling by 4 would overstate risk.
- ARs 9,90,000
- BRs 39,60,000
- CRs 19,80,000Correct
- DRs 4,95,000
Explanation
One-day VaR = 1.65 x 1.5% x 4,00,00,000 = Rs 9,90,000. Scale by square root of 4 = 2, giving Rs 19,80,000. Rs 9,90,000 ignores time scaling; Rs 39,60,000 multiplies by 4 instead of the square root.
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