Whats up with this problem? The answer in the curriculum goes through an iteration of Var as:
-Var = portfolio return - 1.65(standard deviation)
this isnt how it is explained in the book and corresponding BBs and EOCs except for this problem. can someone explain this?
shouldnt an increase in E® increase the VAR dollar amount?
shouldnt an increase in correlation increase the standard deviation leading to a lower VAR dollar amount?
thoroughly confused here…
VAR = Return - 1.65 * Std Dev
And VAR is a negative number - remember
So originally - consider a number R=10%, Std Dev = 10% -> VAR = -6.5%
Now if E® increases to 12% -> 12 - 16.5 = -4.5% - so VAR decreased.
If Variance increases - VAR will move the other way - in that it will INCREASE.
Does this help?
yeah that makes much more sense now…appreciate the help! thanks!
in schweser they say that VAR can sometimes actually be a positive number. so in that case would it be the opposite is true?
never heard of VAR being a positive number. It is usually used in reference to losses – so it would be negative.
Maybe credit var - from the buyer of credit’s perspective could be positive … but am not sure about this.
VAR can be positive if the E® is positively large and SD is small —> ending up with a potive VAR…though I don’t know if there is such an asset in real life.
VAR assumes E®=0 or capped at Rf. This means the E® part is smaller than k*SD, as many said above VAR looks at the negative side.
My way of cracking this: as VAR=value at risk,
* higher potential return --> less loss potential => less VAR
* higher SD (ie higher risk) => higher VAR
* higher probability (more confident to estimate lower loss than bigger loss) --> lower VAR