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CMA Final · Strategic Financial Management · Risks in Financial Market

Portfolio VaR for 1 day at 99% confidence (z = 2.33) is Rs 4,66,000 for a certain portfolio. Using the square-root-of-time rule, what is the 10-day VaR at the same confidence level (take square root of 10 = 3.162)?

The 10-day VaR is about Rs 14,73,492. Under the square-root-of-time rule, risk scales with the square root of the horizon, so Rs 4,66,000 multiplied by 3.162 gives that figure. Scaling linearly by 10 would overstate it.

  1. ARs 46,60,000
  2. BRs 14,73,492Correct
  3. CRs 14,73,000 approximately less at 95%
  4. DRs 4,66,000 x 10 / 2.33

Explanation

10-day VaR = 1-day VaR x sqrt(10) = 4,66,000 x 3.162 = Rs 14,73,492. Multiplying by 10 (Rs 46,60,000) wrongly scales linearly with time.

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