![]() ![]() This method assumes the probability distribution for risk factors is known. Such a method is apt when we have complicated factors. After that, we calculate the change in the value for each scenario and then calculate VAR as per the worst losses. Under this, we calculate VAR by randomly creating scenarios for future stock price returns. Now, the third-worst is chosen to be 99% VAR. After that, the portfolio is valued with the help of full, non-linear pricing models for every scenario. Then current market values are used to calculate the percentage change and get 250 scenarios for future values. With the data, one calculates the percentage change for each risk factor on each day. In this, one uses market data for the last 250 days. One can calculate VAR in three ways: Historical Method If these assumptions are not valid, then the VAR figure is inaccurate as well. ![]() To calculate VAR, one needs to make a few assumptions.So, if a portfolio has a diversity of assets, the task to calculate VAR gets more difficult. One not only has to calculate the risk and return of each security but also correlations among them. Calculating the VAR of a portfolio is a difficult task.There are various methods to calculate VAR, and each method gives a different result.It is because VAR does not consider correlations, and thus, adding may result in double counting. This means the VAR of individual stocks does not equal to the VAR of the total portfolio. It fails to give an idea of the size of the loss related to the extreme data points or the tail of the probability distribution.Moreover, it plays an important role in decision-making as well.Įven though VAR is a pretty useful statistical technique, it suffers from a few drawbacks: Finance experts use this measure widely. ![]()
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