Flashcard Set Preview
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| 1 |
One primary advantage of VAR is the ability to compare
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the operating
performance of different assets with different risk characteristics.
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| 2 |
That is, VAR is interpreted the same, regardless of
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the assets in question.
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VAR
is also frequently used in the risk budgeting process, where upper
management
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allocates VAR across the units and the manager’s goal is to maximize
return for the allocated...
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| 4 |
Although VAR is easily understood and usually accepted by regulatory bodies,
all methods...
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needing to estimate
inputs and make assumptions, and the problem becomes more and more daunting...
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| 5 |
Just identifying all risks
(much less predicting their impacts on portfolio value) may be
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impossible or
financially infeasible.
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Since all the methods for estimating VAR suffer from limiting assumptions,
managers will...
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back test the model(s) to determine historical
accuracy. In addition, many managers will...
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| 7 |
Incremental VAR (IVAR). From a portfolio management standpoint, IVAR
is the effect of
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an individual asset on the overall risk of the portfolio.
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IVAR
is calculated by measuring the difference between
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the portfolio VAR with and
without the asset.
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In this manner IVAR catches the effects of
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the correlation of
the asset with the rest of the portfolio.
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| 10 |
Cash flow at risk (CFAR): Some companies cannot be valued directly, which
makes calculating...
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difficult or even meaningless.
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| 11 |
Instead of using VAR,
CFAR measures the risk of
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the company’s cash flows.
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| 12 |
CFAR is interpreted much
the same as VAR, only substituting
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cash flow for value.
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In other words, CFAR is
the minimum
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cash flow loss at a given significance over a given time period.
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| 14 |
Earnings at risk (EAR) is analogous to CFAR only from an
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accounting
earnings standpoint.
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| 15 |
Both CFAR and EAR are often used to add
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validity to VAR
calculations.
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| 16 |
Tail value at risk (TVAR): VAR is interpreted as
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the minimal loss at a
given significance.
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| 17 |
For example we might say our 5%, 1-day VAR is $1 million.
This means
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the probability of a 1-day loss greater than $1 million is 5%.
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Notice
that this figure doesn’t tell us
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the magnitude of potential losses beyond $1
million.
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In response, TVAR is VAR plus
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the expected value in the tail of
the distribution, which could be estimated by averaging...
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| 20 |
Extensions of VAR: VAR can also be used to measure
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credit at risk, and
efforts have been made to estimate a variation of VAR for assets with...
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