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Portfolio Value at Risk Analysis

The document compares the value at risk (VaR) for two portfolios (Pfolio 1 and Pfolio 2) with different weights of two assets (Asset A and Asset B) at a 99% confidence interval. Pfolio 1 has a long position in Asset A and B, while Pfolio 2 is short in Asset A and long in B. It calculates the individual VaR, covariance, portfolio variance, volatility, and diversified VaR using different methods. It notes that the diversified VaR values for Pfolio 2 are not the same because taking the absolute value of the short position of Asset A makes it a positive value.

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Rhea Gupta
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2 views1 page

Portfolio Value at Risk Analysis

The document compares the value at risk (VaR) for two portfolios (Pfolio 1 and Pfolio 2) with different weights of two assets (Asset A and Asset B) at a 99% confidence interval. Pfolio 1 has a long position in Asset A and B, while Pfolio 2 is short in Asset A and long in B. It calculates the individual VaR, covariance, portfolio variance, volatility, and diversified VaR using different methods. It notes that the diversified VaR values for Pfolio 2 are not the same because taking the absolute value of the short position of Asset A makes it a positive value.

Uploaded by

Rhea Gupta
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Inputs Pfolio 1 Pfolio 2

Initial portfolio value (W) $20 $20


VaR confidence interval 99% 99%

Asset A
Volatility (per year) 10% 10%
Portfolio Weight (w) 50% -50%
Position ($) $10.00 -$10.00 Rishabh:
Individual VaR $2.33 $2.33 Positive value

Asset B
Volatility 20% 20%
Portfolio Weight (1-w) 50% 150%
Position ($) $10.00 $30.00
Individual VaR $4.65 $13.96

Correlation (A,B) 0.50 0.50

Outputs
Covariance (A,B) 0.0100 0.0100
Portfolio variance 0.0175 0.0775
Portfolio volatility (per year) 13.2% 27.8%

Undiversified VaR(Assuming corr = +1) (VarA+VarB) $6.98 $16.28


Diversified VaR (Pfolio var * deviate*value)- Preferred
method by David in xam $6.15 $12.95
Diversified VaR (Sqrt(squares of ind Vars +
2*varA*varB*r)) $6.15 $15.25

The above Diversified VaRs of the Pfolio with short position are not same(12.95 and 15.25) because
While computing individual VaR of short position of Asset A, We have taken absolute value which will
make it +ve value, but if we don't take absolute, both Diversified VaRs will be 12.95

Corr = -1 Corr = 0 Corr = +1


Pfolio VaR In case of pfolio of only long positions Least value > Least Highest value
Pfolio VaR In case of pfolio of long and
short positions Highest value < Highest Value Least value

VaR values will be scaled accordingly as per above criteria if we take different values of correlation

For E.g. In case if Corr is 0.5, VaR for only long Pofolio will be > than VaR when corr is 0, but less than VaR if
corr is +1

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