Portfolio Risk Analytical Methods

Question 1

Describe and state the notation for individual VAR.

Answer 1

Definition: The VAR of one component taken in isolation.

Notation: VARi

Question 2

Describe and state the formula for undiversified VAR.

Answer 2

Definition: The sum of individual VARs (assumes perfect, positive correlation)

Formula: sum(VARi)

Question 3

Describe and state the notation for portfolio/diversified VAR.

Answer 3

• Definition: VAR taking into account diversification benefits between components
• Notation: VARp

Question 4

Describe and state the notation for marginal VAR.

Answer 4

• Definition: Change in portfolio VAR resulting from taking an additional dollar of exposure to a given component
• Notation: delta(VARi)

Question 5

Describe and state the formula for incremental VAR.

Answer 5

• Definition: Change in VAR owing to a new position.
• Formula: VAR_p+a - VAR_p

Question 6

Describe and state the notation for component VAR.

Answer 6

• Definition: How much the portfolio VAR would change if the given component was deleted
• Notation: CVARi