Calculation of Portfolio VaR by using VaR of the individual

ashishsinha
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Posts: 12
Joined: Mon Jul 01, 2013 5:45 pm

Calculation of Portfolio VaR by using VaR of the individual

Postby ashishsinha » Thu Oct 10, 2013 11:23 am

What is the daily portfolio VaR at 97.5% confidence level?
•Investment in asset A is Rs. 40 mn
•Investment in asset B is Rs. 60 mn
•Volatility of asset A is 5.5% and asset B is 4.25%
•Portfolio VaR if correlation between A and B is 20% ?

This question is there in slide 11 of VaR I PDF and has been explained in the next slide of the same PDF. I am okay with the explanation provided in the slide. However, in the recorded version the instructor advised to solve this question using a different methodology. He asked to calculate the VaR (value of it in rupee term)of the individual assets and not their %age and then put the same in the formula for portfolio VaR. The answer which this method gives, does not match with the one provided in slide 12. Please explain which of the methodologies are correct?

vighnesh.mehta
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Posts: 16
Joined: Tue Sep 03, 2013 1:16 pm

Calculation of Portfolio VaR by using VaR of the individual

Postby vighnesh.mehta » Sat Oct 12, 2013 2:26 am

Hi,

Both the methods of calculating Portfolio VAR is correct and should give the same answer with some fractional difference due to rounding effect.

The Instructor way of calculating VAR is a better option since the number of input values decreases when we calculate VAR using the square root.

Can you provide me with your answer.


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