## Calculation of VAR

rinky63a
Good Student
Posts: 15
Joined: Fri Jul 27, 2012 3:42 pm

### Calculation of VAR

(1) The Westover Fund is a portfolio consisting of 42% fixed-income investments and 58% equity investments. The manager of the Westover Fund recently estimated that the annual VAR (5%), assuming a 250-day year, for the entire portfolio was \$1,367,000 based on the portfolio's market value of \$12,428,000 and a correlation coefficient between stocks and bonds of zero. If the annual loss in the equity position is only expected to exceed \$1,153,000; 5% of the time, then the daily expected loss in the bond position that will be exceeded 5% of the time is closest to:
Select one:
a. \$72 623
b. \$46,445.
c. \$21,163.
d. \$55,171.
Feedback
\$46,445.

Can you pls guide me with the calculation of above example.

Finance Junkie
Posts: 258
Joined: Thu Sep 20, 2012 3:42 pm

### Calculation of VAR

The formula for dollar portfolio VAR to compute the annual VAR(5%) for the bond position:

VAR2portfolio = VAR2Stocks + VAR2Bonds + 2VARStocksVARBonds ρStocks, Bonds

(1,367,000)2 = (1,153,000)2 + VAR2Bonds + 2(1,153,000)VARBonds(0)

VARBonds = [(1,367,000)2 – (1,153,000)2]0.5 = 734,357

Next convert the annual \$VARBonds to daily \$VARBonds:

734,357 / (250)0.5 = 46,445.