CA Final · Advanced Financial Management · Risk Management
A portfolio manager at a Mumbai asset management firm holds a portfolio worth Rs 50 crore. Daily returns are assumed to be normally distributed with a daily standard deviation of 1.5%. Using the parametric (variance-covariance) method, what is the 1-day 95% VaR? (Use z = 1.65 for 95% one-tailed.)
The 1-day 95% parametric VaR is Rs 1.2375 crore. One standard deviation is 1.5% of Rs 50 crore, which is Rs 0.75 crore, and multiplying by the 95% one-tailed z-value of 1.65 gives the potential loss not exceeded with 95% confidence.
- ARs 1.2375 croreCorrect
- BRs 0.75 crore
- CRs 2.475 crore
- DRs 1.65 crore
Explanation
VaR = 1.65 x 1.5% x Rs 50 crore = 1.65 x 0.75 crore = Rs 1.2375 crore. Rs 0.75 crore is just one standard deviation, omitting the z-factor. Rs 2.475 crore wrongly uses 1.65 x 1.5 crore x 1.65... effectively double counting the factor.
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