Financial Risk Manager Part 1
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A market risk analyst at a regional bank is tasked with calculating the annual Value at Risk (VaR) for a portfolio that consists of investment securities. The current valuation of the portfolio is USD 3,700,000, and it exhibits a daily variance of 0.0004. Assuming there are 250 trading days in a year, and the daily returns of the portfolio are independent, normally distributed, and mean zero, what is the 1-year VaR at a 95% confidence level?
A market risk analyst at a regional bank is tasked with calculating the annual Value at Risk (VaR) for a portfolio that consists of investment securities. The current valuation of the portfolio is USD 3,700,000, and it exhibits a daily variance of 0.0004. Assuming there are 250 trading days in a year, and the daily returns of the portfolio are independent, normally distributed, and mean zero, what is the 1-year VaR at a 95% confidence level?
Explanation:
C is correct. This is an implementation of the“square root rule": Daily standard deviation = 0.00040.5 = 0.02 = 2% Annual VaR= USD 3,700,000 * 2500.5 * 0.02* 1.645=USD 1,924,720 A is incorrect. USD 38,494 is the result obtained when variance, instead of the standard deviation, is used in the VaR formula. B is incorrect. USD 121,730 is the 1-day VaR at the 95% confidence level. D is incorrect. USD 2,721,519 is the 1-year VaR at the 99% confidence level.