Bank of Alaska's stock portfolio has a market value of $10 million. The beta of the portfolio approximates the market portfolio, whose standard deviation (am) has been estimated at 1.5%.
What is the five-day VAR of this portfolio using adverse rate changes in the 99th percentile?
Value At Risk:
The value at risk is the potential periodic loss to the portfolio with a given probability. The loss depends on the probability required and the standard deviation of the portfolio returns which is a measure of risk.
Answer and Explanation:
The VAR of the portfolio is estimated to be $78,150.58
The standard deviation for One tailed return from the Z Score table is 2.33 Standard Deviations. The VAR can be calculated as:
VAR = Z-Score * SD * Portfolio Value * Sqrt(Days)
From the question, we have the value as:
- Z-Score = 2.33
- SD (Standard Deviation) = 1.50%
- Portfolio Value = $10,000,000
- Days = 5
VAR= 2.33 * 0.015 * $10,000,000 * Sqrt(5)
VAR = $78,150.58
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Learn more about this topic:
from Finance 305: Risk ManagementChapter 3 / Lesson 3