Calculation of VAR

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

Calculation of VAR

Postby rinky63a » Sun Sep 29, 2013 7:24 am

(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.
The correct answer is B
The correct answer is: $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

Postby pradeeppdy » Wed Oct 09, 2013 11:26 am

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.

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