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CMA Final · Strategic Financial Management · Risks in Financial Market

A portfolio manager at a Mumbai mutual fund holds a portfolio of Rs 50 crore. Daily returns are normally distributed with a daily standard deviation of 1.5%. Using a one-day 95% confidence level (z = 1.65), what is the parametric Value at Risk (VaR)?

The one-day 95% parametric VaR is about Rs 1.24 crore. It equals the z-value 1.65 multiplied by the daily standard deviation of 1.5% and the portfolio value of Rs 50 crore, giving Rs 1.2375 crore.

  1. ARs 0.75 crore
  2. BRs 1.24 croreCorrect
  3. CRs 2.48 crore
  4. DRs 1.65 crore

Explanation

VaR = z x sigma x portfolio value = 1.65 x 1.5% x 50 crore = 1.65 x 0.75 crore = Rs 1.2375 crore, about Rs 1.24 crore. Rs 0.75 crore is just one standard deviation and ignores the confidence factor. Rs 2.48 crore wrongly doubles the figure.

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