easy · Principles of Finance risk-return-portfolio
An investor calculates the Value at Risk (VaR) for a portfolio.
If the daily 1% VaR is $2.5 million, what does this signify?
- The portfolio is guaranteed to never lose more than $2.5 million on 99% of trading days.
- There is a 1% probability that the portfolio will lose $2.5 million or more in a single day.
- The average loss recorded across the worst-performing 1% of trading days equals $2.5 million.
- The portfolio's expected return is calculated to be negative $2.5 million at a 1% confidence level.
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