CMA Final · Strategic Performance Management and Business Valuation · Risk Management
Case: Kaveri Textiles has a portfolio worth Rs 50 crore. Daily returns are normally distributed with a mean of zero and a daily standard deviation of 1.5%. Use z = 1.65 for 95% one-tailed confidence and assume 4 trading days in the horizon, with returns independent. What is the 4-day 95% VaR?
The 4-day VaR is about Rs 2.48 crore. Daily volatility of 1.5% scales by the square root of 4 to 3%. Multiplying 1.65 x 3% x Rs 50 crore gives Rs 2.475 crore.
- ARs 4.95 croreCorrect
- BRs 1.24 crore
- CRs 2.48 crore
- DRs 9.90 crore
Explanation
Four-day SD = 1.5% x sqrt(4) = 3%. VaR = 1.65 x 3% x 50 = 0.0495 x 50 = Rs 2.475 crore, about Rs 2.48 crore. Option Rs 4.95 crore would result from scaling by 4 days instead of the square root of 4 only in part, so it is wrong; Rs 1.24 crore is a one-day VaR (1.65 x 1.5% x 50).
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