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Essentials Of Investments
Found in: Page 141
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

Suppose you’ve estimated that the fifth-percentile value at risk of a portfolio is -30%. Now you wish to estimate the portfolio’s first-percentile VaR (the value below which lie 1% of the returns). Will the 1% VaR be greater or less than -30%?

1% VaR will be less than -30%.

See the step by step solution

Step by Step Solution

Given information

Fifth-percentile VaR of a portfolio = -30%

Explanation

VaR or “Value at Risk” is the measure of downside risk.

In the above scenario, since the percentile or probability of a return has declined, the magnitude of that return will also decline. Thus, a 1 percentile probability will produce a smaller VaR than a 5 percentile probability. Therefore 1% VaR will be less than -30%.

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