Value at Risk Basics

Question 1

What does “VaR” refer to?

Answer 1

Value at Risk is in other words a projected loss amount

Value at Risk = -(average return + z-score x volatility) x principal

Question 2

What does “µ” refer to?

mu

Answer 2

Estimated average/mean return

Question 3

What does “σ” refer to?

sigma

Answer 3

Volatility or Standard Deviation

Question 4

What is a Z score?

Answer 4

Numerical measurement of standard deviations from the mean.

Question 5

What does “Principle” refer to?

P

Answer 5

Marked-to-market value of the portfolio

Question 6

What are standard confidence intervals to calculate VaR? (in %)

Hint: VaR produces cautious estimates of loss.

Answer 6

90%, 95%, 97.5% & 99%

Question 7

What is the excel function to find the Z statistic for a given confidence interval?

Answer 7

=NORM.S.INV(1-CI)

CI = Confidence Interval

Question 8

The VaR statistic has three components, what are they?

This question refers to the VaR STATISTIC (not formula)

Answer 8

A period, a confidence level, and a loss amount or loss percentage

Question 9

What does a high confidence interval percentage provide?

i.e. CI 99%

Answer 9

A more cautious estimate of the projected loss amount.

Question 10

The VaR formula has four components, what are they?

This question refers to the VaR FORMULA (not statistic)

Answer 10

Average return (mu), Z score, Volatility (sigma), Investment Amount or Principle (P)