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CMA Final · Strategic Financial Management · Risks in Financial Market

Ananya Traders holds an equity portfolio of Rs 10 crore. Daily return volatility is 1.5% and returns are assumed normal with zero mean. Using a 95% confidence level (z = 1.65), what is the one-day Value at Risk, and what is the 4-day VaR using the square-root-of-time rule?

One-day VaR is Rs 24.75 lakh, being 1.65 times 1.5% of Rs 10 crore. Scaling to four days uses the square root of time, which is 2, giving Rs 49.50 lakh. Multiplying by 4 would wrongly assume risk grows linearly with time.

  1. AOne-day Rs 24.75 lakh; 4-day Rs 99.00 lakh
  2. BOne-day Rs 24.75 lakh; 4-day Rs 49.50 lakhCorrect
  3. COne-day Rs 15.00 lakh; 4-day Rs 30.00 lakh
  4. DOne-day Rs 49.50 lakh; 4-day Rs 99.00 lakh

Explanation

One-day VaR = 1.65 x 1.5% x Rs 10 crore = 1.65 x Rs 15 lakh = Rs 24.75 lakh. 4-day VaR = 24.75 x sqrt(4) = Rs 49.50 lakh. Rs 99 lakh multiplies by 4 instead of the square root of 4.

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