If you are to calculate any one of these, are we to use weekly returns and monthly returns respectively? If they ask you to calculate monthly VAR and they give you annual returns, are we able to calculate this?
If you need to calc monthly VAR and you are given annual returns + std dev, then you can first calc annual VAR and then convert that to monthly VAR as: monthly VAR = annual VAR/ sqrt(12) - BN
Sorry, disagree with BN You first calculate monthly returns = annual returns / 12 then you calculate monthly std dev = annual std dev / sqrt(12) to finally plug these numbers in formula to get monthly VAR. You can do what BN proposed only if annual return =0.
ah very good, but I don’t understand the intuition of the sq. rt. ing?
You mean, why do we divide standard deviation by sqrt ? or something else ? sorry, could you precise your question ?
yeah, i understand dividing by 12, just don’t understand the intuition of sq rt ing it. Also, can we get a confirmation on the correct calculation offered by vic?
vic is correct There is a half page devoted to the issue of recalculating VAR in CFA books
Vic’s calculation for converting VAR is correct under the assumption that mean return is 0, which is a reasonable assumption for daily returns. Lets say you have daily VAR value and want to convert it to monthly. If you assume that mean return is zero, only standard deviation will be increased by the square root of time, so does your VAR. When you are goingback from monthly to annual as a short cut you can just divide by square root of time. This is an approximation, but somehow acceptable because it will be more conservative (larger VAR value)
vic Wrote: ------------------------------------------------------- > Sorry, disagree with BN > > You first calculate monthly returns = annual > returns / 12 > then you calculate monthly std dev = annual std > dev / sqrt(12) > to finally plug these numbers in formula to get > monthly VAR. > > You can do what BN proposed only if annual return > =0. what’s the formula you plug into?
(R - Zscore x STDev) x Value of Port
What if it asks for daily VAR and they give you annual data? How many days do we use or are we assuming they most state the # of days in a year? What is it they usually assume like 252 trading days in a year or something?
FYI: day count per month is 22 for this purpose as well
Damn your quick CSK, I don’t get you guys though I know posting on the forum helps with the studying but it seems like you guys are always on here… When the heck do you guys sit down and do a practice exam or a reading? Anyhow thanks for all the help.
s23dino Wrote: ------------------------------------------------------- > Damn your quick CSK, I don’t get you guys though I > know posting on the forum helps with the studying > but it seems like you guys are always on here… > When the heck do you guys sit down and do a > practice exam or a reading? Anyhow thanks for all > the help. Ask me a better question: When do i work? My employer wants to know too
Man and I thought I did little work around here… Anyhow lets keep it up.
the reason for the SQRT(n) in VAR formula is because: when you have annual Variance to get monthly variance you do: Variance/12 = Std^2/12 now monthly Std = SQRT(monthly Variance) Std = SQRT(Std^2/12) = Std / SQRT(12)
We had a discussion aleady. If you have R and Sd, use full formula to calc. If you don’t, just assume R = 0, and divide by sqrt(t)