Portfolio VaR - Questions

FRM
#1

Hi there,

I would appreciate if someone could help me clarify some of the questions I had on Portfolio Value at Risk using the Variance-Covariance approach. Details as follows.

Number of Stocks: 5 (all in US Market so no FX impact)

Data: 5 years of price history

To Calculate: 95% Daily VaR

STEPS:

  1. Calculate daily return on stocks for the five year history

  2. Get a 5 * 5 correlation matrix based on the calculated returns (Using Correl() function in excel)

  3. Get the standard deviation using stdev() on daily returns

Question: Since I am using the five year history to calculate daily returns, do I need to scale the standard deviation?

  1. Calculate individual VaR using the current market values for each stock position.

1.65 * std dev * current mkt value of position

  1. Transpose indivdual VaRs to get a column vector and matrix multiply with correlation matrix using MMULT()

  2. Matrix multiply the result from previous step (a row vector) with indivdual VaRs

  3. Take square root of the result

Makes sense?