Explanation:
The daily delta-normal VaR is calculated as , where is the expected 1-day return on the portfolio, is the z-value corresponding to the desired level of significance, and is the standard deviation of 1-day.
The historical simulation VaR for 2% is the 5th lowest return, which is −2.59%; therefore, the correct VaR (which is typically stated as a positive [loss] value) is:
(Book 4, Module 49.2, LO 49.d)
Ultimate access to all questions.
Question 40
A portfolio manager of an endowment wants to compare the VaR estimates from the delta-normal method to the historical simulation method. The €100,000,000 portfolio is restricted from using derivative securities. The daily return is expected to be 0.0004, with a daily standard deviation of 0.0095. The manager uses a 2% level of significance that has a z-value of 2.05. The manager ranked the 250 daily returns from last year from highest to lowest, and reports the lowest six returns to be: −0.0191, −0.0259, −0.0311, −0.0354, −0.0368, and −0.0384. What is the daily VaR using the delta-normal method compared to the historical simulation method?
A
The delta-normal method estimate is the same as that of the historical simulation method.
B
The delta-normal method estimated VaR is €910,000.
C
The historical simulation method estimated VaR is €2,590,000.
D
The historical simulation method estimated VaR is €3,680,000.
No comments yet.