Q about 2011 morning session, 8B

VaR question…

The answer starts with calculating, based on a 6% annualized return, that the monthly return is .005 (= .06/12) … Am I just being really stupid or worn out or just missing something bc its late, by thinking the monthly return should be .00487 [= 1.06^(1/12) - 1]

they do not consider geometric returns in VaR. It is usually an arithmetic return.

in any problems in the book - when they provide you annual return and move to monthly - they divide by 12.

similarly for standard deviation - they divide the annual std deviation by sqrt(12) to arrive at monthly standard deviation.

It depends on whether the 6% is a nominal rate or an effective rate. You’re assuming effective; they’re assuming nominal.

No the monthly return should be .06/12. Thats just the way they do it. The monthly stdev should be Annual stdev/sqrt 12.

i agree - it is non-sensical - but that is the way they want us to do it.