CMA Final · Strategic Financial Management · Risks in Financial Market
Arjun holds a portfolio worth Rs 10,00,00,000 whose daily returns have a standard deviation of 1% and are normally distributed. Using a 99% confidence level (z = 2.33), what is the one-day Value at Risk?
One-day VaR is Rs 23,30,000. It equals the z-value 2.33 multiplied by the daily standard deviation of 1% and the portfolio value of Rs 10 crore, meaning losses should exceed this amount only about 1% of days under normality.
- ARs 23,30,000Correct
- BRs 2,33,00,000
- CRs 10,00,000
- DRs 7,36,800
Explanation
One-day VaR = z x sigma x value = 2.33 x 1% x 10,00,00,000 = Rs 23,30,000. Rs 10,00,000 uses only one standard deviation. Rs 7,36,800 wrongly divides by the square root of 10 after scaling (2.33 x 1% x 10 crore / sqrt10), and the Rs 2,33,00,000 option mistakes the percentage by a factor of 10.
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