Z-Score

CFA Level III
#1

Will this be given to us if we need to calculate VAR?

#2

5% = 1.65 1% = 2.33 2.5% = 1.96 That’s all you need to know. Mainly the first 2 probably.

#3

or they will give you the table and you will have to pull the correct number from it

#4

Awesome - thanks bigw

#5

so 1.65 is 5%. and its the end area on one tail right? not 2.5+2.5 on both tails?

#6

yep 1.65 corresponds to .95 from the Z-table (if we want to be supper precise it should be 1.645)

#7

Yes, sorry missed your response Turk; 99% = 2.33 95% = 1.65 97.5% = 1.96

#8

wait I forgot how to calculate VAR!!! anybody remember the formula before I lose it? Thanks…

#9

Variance-Covariance (Analytical) Method (Expected Return - Z-score * Std Deviation) * Notional.

#10

thank you bigwillie, you saved my sanity…

#11

don’t forget to adjust for the time frame… daily, weekly, monthly VAR, etc.

#12

VAR is calculated as an annual number. to get Daily Var = VAR/SQRT(DAYS) or Monthly Var = VAR/SQRT(12). God I hope this is correct.

#13

pimp Wrote: ------------------------------------------------------- > VAR is calculated as an annual number. to get > Daily Var = VAR/SQRT(DAYS) or Monthly Var = > VAR/SQRT(12). God I hope this is correct. Unless they give you the return and standard deviation in annual and want monthly or something like that. Annual returns are divided by 12 to get monthly. Annual SD is divided by SQRT(12) to get monthly.

#14

^Yes Very important. Std Deviation must be adjusted by the SQRT of the number of either Days/Months/Weeks that you are adjusting it to. Return you can simply divide or multiply. Also, The VAR of 1 day should use 0% as Expected Return and ONLY if you use 0% can you extrapolate the 1 day VAR to longer time periods ----- at least thats what I remember reading.

#15

so the formula will only calculate annual VAR and I have to adjust it (eg. devide by 12 to get monthly VAR?) right?

#16

If you use Annual returns and Annual std deviation, then Yes Iwona it will give you an Annual VAR.

#17

Oh and NO you can’t divide an annula vAR by 12 to get monthly

#18

That’s what I meant - Annual Var is divided by SQRT(12) to get monthly var. I knew I knew what I was talking about.

#19

ahhhhh, ok NOW I get it… I better read that again tonite…

#20

^No that wont work either: Best method is take say Annual Std Deviation of 8% say, and divide 8%/SQRT(12) to get Monthly Std Dev and take say return of 5% and divide by 12 to get monthly of 0.42%. So your VAR would be 0.42% - 1.65(2.31) = -3.39% If we used your method we would get 5% - 1.65*(8) = -8.2% then 8.2%/SQRT(12) = -2.37%