Var

manish.g
Good Student
Posts: 10
Joined: Sun May 06, 2012 2:31 pm

Var

Postby manish.g » Sun May 06, 2012 2:32 pm

Hi,
Can you pls explain below solution

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:

Choose one answer.
a. $72 623
b. $46,445.
c. $21,163.
d. $55,171.

Pristine answer is $46,445.

Tags:

suresh.wadhwani2009
Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

Re: Var

Postby suresh.wadhwani2009 » Sun May 06, 2012 6:08 pm

I have the same doubt. My ans is $179539.95 calculated using the formula for portfolio VaR.

Dear Content pristine,
Pls help

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Var

Postby content.pristine » Mon May 07, 2012 11:01 am

Hi Everyone!

There are just two steps to solve this question:
Step 1: Know the Portfolio VaR formula ;)
Step 2: Know how to Un-annualize yearly VaR

Step 1: Since correlation = 0,
VaR(P)^2 = VaR(E)^2 + VaR(D)^2
(you would probably recognize the formula VaR(P)=SQRT( VaR(E)^2 + VaR(D)^2 )
Here, since VaR's are directly given, you don't need to use neither the weights, nor the market values 8-)

Solving, Yearly VaR(D) = 734,356.86
Un-annualizing this, Daily VaR(D) = 734,356.86/SQRT(250)
= 46,444.81

Hope this helps 8-)

suresh.wadhwani2009
Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

Re: Var

Postby suresh.wadhwani2009 » Mon May 07, 2012 12:44 pm

I was using weight... which we used to do during variance calculation.

Thanks fa clearing these small small things which can have a big impact on final xm.
:-)

bks.gtb
Good Student
Posts: 13
Joined: Sat Apr 07, 2012 7:43 pm

Re: Var

Postby bks.gtb » Fri May 11, 2012 4:43 am

Hi,

This could be silly question, i am not able to get the working for VAR of the debt portion which is worked out as 734,356.86.

Total portfolio var is 1367000
Equity portfolio var is 1153000
Debt portfolio how did we arrive at 734356.86?

Sorry again but wanted to be sure on the workings..

suresh.wadhwani2009
Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

Re: Var

Postby suresh.wadhwani2009 » Fri May 11, 2012 10:53 am

Dear Bks,

[VaR(P)]^2=[VaR(e)]^2 +[Var(d)]^2
(1367)^2=(1153)^2+[VaR(d)]^2
[Var(d)]^2=539280
VaR(d)=Sqrt(539280)
VaR(d)=734.356

Multiply thsi with 1000 as I have removed 3 zeros in calculation for making it easy.

So, VaR(d)=734356.86

Hope it helps:)

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Var

Postby content.pristine » Fri May 11, 2012 6:59 pm

Thanks for working that out Suresh 8-)


Return to “FRM Part I”



cron

Disclaimer

Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to abuse@edupristine.com and we will rectify it.