## Var

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

### Var

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:

a. \$72 623
b. \$46,445.
c. \$21,163.
d. \$55,171.

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

### Re: Var

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

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

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

Hope this helps

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

### Re: Var

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

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..

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

### Re: Var

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

Thanks for working that out Suresh