 # VAR

“VAR decreases with increased returns and increases with increased correlations” True or false?

decreases with increases return - True

Doesn’t it depend on the variability of the returns? It would decrease with decreased variance, but not with increased return if that meant increased variance.

Two are independent of each other. cfaboston, Explanation would be nice. I do not comprehend this.

FALSE & FALSE VAR = E® - (z-factor * S.D.) If Returns Increase, the VAR Increases If Correlations Increase, then Volatitility Increases, so S.D. Increases, so VAR Decreases

I tried to work it out : e.g interest rates are say 10%, then: VAR = .10-1.65*.05 - std is assumed = .10-.08250 = .01750 Now, if the return increases from 10 to say 15%, VAR = .15 -.0825 = .06750 So I drew my conclusion that when return increase, VAR increases. For the second criteria - when correlations increase, std deviation is supposed to decrease right? If VAR = .10-1.65*.05 - std is assumed to be .05 = .10-.08250 = .01750 Now, if the std decreases from 5 to 4 , VAR = .10 -1.65* .04 - std decreases, = .10-.066 = .034 So I drew my conclusion that when std decrease, VAR increases. AM I correct here?

TRUE!! A. Higher expected returns shift the mean towards the right of the distribution thereby reducing left tail returns, reducing VAR. B. A higher correlation will make the standard deviation of the portfolio increase, all things being equal. A higher standard deviation increases VAR.

B. A higher correlation will make the standard deviation of the portfolio increase, all things being equal. A higher standard deviation increases VAR. >> forgot this stuff :(( did we learn it in L2? Thanks

Leo_Land, which page is this on CFAI? “A. Higher expected returns shift the mean towards the right of the distribution thereby reducing left tail returns, reducing VAR. B. A higher correlation will make the standard deviation of the portfolio increase, all things being equal. A higher standard deviation increases VAR.”

Leo_land Wrote: ------------------------------------------------------- > TRUE!! > > A. Higher expected returns shift the mean towards > the right of the distribution thereby reducing > left tail returns, reducing VAR. > > B. A higher correlation will make the standard > deviation of the portfolio increase, all things > being equal. A higher standard deviation increases > VAR. Where did you get B? I think that is wrong.

Leo_Land & HappyKing02 I think Leo_Land is correct. My logic reveals the same answer as Leo_Land, except I forgot the Negative Signage which I have added now in CAPS. ANSWER: TRUE & TRUE VAR = E® - (z-factor * S.D.) If Returns Increase, the VAR Increases (BUT IT IS INCREASING A NEGATIVE NUMBER WHICH MEANS VAR DECREASES) If Correlations Increase, then Volatitility Increases, so S.D. Increases, so VAR Decreases (BUT IT IS DECREASING A NEGATIVE NUMBER WHICH MEANS VAR INCREASES) All clear?

happyking02 Wrote: ------------------------------------------------------- > Leo_land Wrote: > -------------------------------------------------- > ----- > > TRUE!! > > > > A. Higher expected returns shift the mean > towards > > the right of the distribution thereby reducing > > left tail returns, reducing VAR. > > > > B. A higher correlation will make the standard > > deviation of the portfolio increase, all things > > being equal. A higher standard deviation > increases > > VAR. > > > Where did you get B? I think that is wrong. Yeah, where did you get B? Thanks!