The New Science Of Risk Management: Value At Risk

1431 words - 6 pages

The purpose of this article is to gain a concrete understanding of the perception of Value at Risk, its strengths and weaknesses, and controversies related to its use in managing risk. Two articles will be used to help with the understanding of VaR, “An Irreverent Guide to Value at Risk,” by Barry Schachter and “Subjective Value-at-Risk,” by Glyn Hoyt. These articles will give us some background by describing VaR, understanding its limits, and its developing role in risk management.

Article 1 “An Irreverent Guide to Value at Risk”

Value at Risk has been called the “new science of risk management.” Around the world, organizations are sprinting to implement the new technology.

Because ...view middle of the document...

This is a lot to ask for and it's something that cannot be delivered without compromises. VaR and Standard Deviation are both related measures of a distribution of returns. The Modern Portfolio Theory (“MPT”) tells us that the risk in a portfolio can be measured by the portfolio standard deviation, a calculation of spread in a distribution. Unfortunately, and particularly when related to hedge funds, standard deviation does not capture to total risk picture of returns. This is because most hedge funds do not have normally distributed returns.

Standard deviation, according to MPT, is the relevant information needed to construct risk limits for optimal risk management decisions. But when looking for the Holy Scale, standard deviation loses its application in MPT. When thinking about risk, managers tend to think in terms of loss of dollars, whereas standard deviation looks at volatility in terms of deviations, either above or below. This means that its expected return is not always clear. Another reason why standard deviation isn't the Holy Scale is because it assumes symmetry, everything that happens on one tail will happen to the other. But when we look at trading portfolio deviations of any amount below the expected return, they are not equal and do not happen when the deviations are above the expected return. This shows us that a different means for measuring risk is needed, and maybe the Holy Scale has been discovered in VaR.

3 Ways to Calculate VaR

VaR is evolving and should be experimented on, but when it comes to choosing the “best practice” many have come to find that there isn't one. The author titles this part of his article The Slip 'Twixt Cup and Lip, which implies that even when the outcome of an event seems certain, things can still go wrong.

VaR is typically calculated by first modeling the entire returns distribution for a position of a portfolio, then calculating the value at the percentile corresponding to the desired confidence level. There are three common methodologies for doing this: Historical Simulation, Parametric Modeling, and Monte Carlo (stochastic) simulation. These methodologies along with their advantages and disadvantages are discussed in more detail below. Parametric VaR is calculated by the following formula: mean- # of standard deviations * standard deviation. The historical simulation method consists of going back in time and applying current constraints to a time-series of historical asset returns. This return doesn't represent an actual portfolio, but rather recreates the history of a hypothetical portfolio using the current position. Instead of using past values of market factors for prediction, the stochastic simulation uses a method of financial molding in which one or more variables in the model are random. All three of these models have strengths and weaknesses.

The parametric method has the benefit of being computationally fast for linear assets, but has a problem with...

Find Another Essay On The New Science of Risk Management: Value-at-Risk

Animals At Risk Of Endangerment Essay

640 words - 3 pages thing dies out because it cannot keep up with the natural changes in its environment. Species are becoming extinct at an alarming rate. Protecting the endangered species in the world can be a difficult challenge because their natural habitats are being destroyed by the people who live amongst them. Habitat destruction, introduction of new species, and hunting/ trading are the main causes of all endangered animals and has become a serious

The Next Generation at Risk Essay

1838 words - 7 pages answer to stop unemployment rates from increasing. Future Americans have a higher risk of being unemployed if they do not carry a high school degree. By revolutionizing the school system an increase in higher education would rise. Today the education in America is at risk of losing the value because students are now seeking elsewhere or given up. Therefore, if technology is not successfully used in education, the next generation would be at high

the risk and benefit of starting new business in Britain

1756 words - 8 pages those new businesses. Despite the global recession in 2008 that started in USA, Britain once more successfully proved that this country can survive this severe economic condition. Even in the start of 2014, Britain has become a survivor by do it’s best and increase the Gross Domestic Product (GDP) into 1.9% at the end of 2013 . This economic condition in Britain brings benefits to the new businesses. But since the recovery process is still on the way

Children in African American Community at risk of the HIV/

2125 words - 9 pages Children in African American Community at risk of the HIV/AIDS Many African Americans are at high risk of the HIV infection and many of them are unaware or have a lack of access to care, education and prevention services. With African American’s making up fourteen percent of the population, they make up almost half of all people infected with HIV. According to, Exploring the Social and Community Context of

Alternative Treatment at Menopause to Reduce the Risk of Osteoporosis

2431 words - 10 pages (Radhakrishnan, 2005).In summary, soya protein and isoflavones appear to have a promising role in the management of menopausal symptoms and associated disease. There is emerging evidence from a few clinical studies that phyto-estrogens can reduce the risk of heart disease and osteoporosis. Vital at every age for healthy bones, exercise is important for treating and preventing osteoporosis (Klotter, 2005). Not only does exercise improve your bone health, it

After-School Programs: Guiding the Path of At-Risk Youth

967 words - 4 pages Today’s youth are facing serious critical risks leading to preventable crisis. There are many factors in their lives causing this downward spiral. Teens who have trouble managing the stresses of life are more likely to abuse drugs and alcohol, engage in criminal activity, are sexually promiscuous, and attempt suicide. Many of these at-risk teens become the next amber alert living on the streets or eventually behind the bars of a detention center

Risk and net Present value

7852 words - 31 pages institutional portfolios are managed, and motivated the use of passive investment management techniques. The mathematics of portfolio theory is used extensively in financial risk management and was a theoretical precursor for today's value-at-risk measures.4.5 OptionsOptions on stocks were first traded on an organised exchange on 1973. Since then there has been a dramatic growth in options market. Options are now traded on many exchanges throughout the

Helping At-Risk Teenagers

1455 words - 6 pages -motivation or a diligent effort in developing a particular skill. There are multiple solutions to the problem because there are multiple causes. If just one of these causes can be eliminated, then the chances dramatically increase for the There is no one way of having a teen succeeds. Human beings are designed to overcome adversity and improve themselves; they just need to be pointed in the right direction. At risk youth can be described

Who Is At Risk?

943 words - 4 pages and externally at the same time. Some youths have already experienced traumatic events in their lives or living through them during them at this time. In this paper I am going to describe some risk factors that could lead to youth experimenting with and becoming addicted to drugs and alcohol. Statistics of what drugs are most widely abused by America’s youth. What treatment options are available and which have been the most successful. Education

Teaching At-Risk Youth

2717 words - 11 pages already. We discussed in class that states such as California are using reading scores to anticipate how many new jails they need to build rather than reinvesting that money into the education of those at-risk students. 2. Five key indicators for at-risk youth are: a. Minority, racial or ethnic b. Living in a poverty household c. Living in a single parent home d. Having a poorly educated mother e. Having a non-English language background 3

A Nation at Risk

738 words - 3 pages On August 26, 1981 Education Secretary Terrel Bell created the National Commission on Excellence in Education. The members appointed by Bell to this team were commissioned to conduct an eighteen month study of primary and secondary education in America. They were to present a detailed, unbiased report on the quality of education in America to the American people by April of 1983. The report that was produced was titled A Nation at Risk: The

Similar Essays

The Value Of Risk Taking Essay

1004 words - 5 pages becomes clear. Instead of wasting my time on video games and TV shows, I start to spend more on learning new technologies and life hacks. When I break out of my comfort zone and enter a new challenging area, I begin to see many new and better opportunities waiting for me to grab them. Risk taking is very prevalent in The Magicians, the second book for the class. Quentin and his friends’ decision to go to Fillory, the dreamland they

Risk Management At Rim Essay

3034 words - 12 pages FNSV 6990 AssignmentAli ArastehEmail: aliarasteh@gmail.comWinter 2012Executive SummaryThis report presents an analysis of the risk facing Research In Motion (RIM) business and operation. An introduction to RIM is provided which also identifies the ways that RIM creates value for its customers. Multiple strategic, operational, financial, and intangible risks facing RIM business were identified. A holistic approach for risk management was

Value & Risk Management In Construction

3143 words - 13 pages value of a collection is necessary for both risk management and narrow purposes. Value at risk has so far been the most well-liked in determining monetary risk in monetary institutions and the majority risk managers feel that it might have prevented monetary disasters approximating Barings, Orange County and Sumitomo.According to the expert analysis the Value at risk was urbanized in response to monetary disasters of the 1990s and obtained a

Description Of The At Risk Student Essay

2386 words - 10 pages Description of the at-risk student Across the United States, there are certain factors that predict a student’s likelihood of becoming at-risk for failure. Benard says that, “Social science research has defined poverty, a social problem, as the factor most likely to put a person at-risk for ... school failure”(1997). Since there were 12.1 million children living in poverty in the United States in 2002, according to the census, the at-risk