So in the VAR question, 3 industries are provided with VARs as follows: Energy 300 VAR, measured @ 10 days with 5% probability Technology 200 VAR, measured @ 5 days with 1% probability Media & Ent 100 VAR, measured @ 1 day with 3 % probability it is also given that expected return is 0, and normally dist. returns, and 250 trading days/year. The question asks which has the smallest annual VAR. The following formula is used: VARannual = VARn (250/n)^(0.5) where n is the number of days (10, 5, and 1, respectively). It completely ignores the probability of the VAR. I would figure that’s important, if you’re concerned about standardizing the comparison, no? anyone else with me on that? Anyways, I solved it by standardizing the standard deviation. the given answers, which disregard the probability of the var, goes as follows:
E= 1500 T = 1414 M = 1581 the Z values at 5, 1, and 3 %, respectively, are 1.65, 2.33, and 1.88. knowing that, we can divide and solve for the standard deviation of each, and compare apples to apples. the standard deviation for each industry, then, is: E= 1500/1.65 = 909 T = 1414/2.33 = 607 M = 1581/1.88 = 840 Doesn’t change the answer in this case, but my fear is that during an exam, the two approaches might lead to a different answer, and the one I did here is, in my opinion, more correct, since it standardizes the VARs to the same probability. I’m hoping it won’t be a thing tho