VAR EOC question - possible error possible, question, expected, increase, standard

Muddahudda

I am wondering whether the answer to question 23, p. 283, vol. 5 is correct.

Basically the question asks whether an increase in expected return will increase VAR and also whether an increase in correlation between assets in the portfolio will increase VAR.

The answer states that the increase in expected return will not increase VAR due to less losses and that an increase in correlation will increase VAR due to the higher standard deviation of the portfolio. Taken in isolation this sounds totally logical, doesn't it? Does to me.

However when i try to plug these into the formula VAR= (R-z*st dev)*V, all of this does not make any sense. Contrary to the answer, when you increase R, VAR will increase. Also when you increase the correlation between the assets in the portfolio the standard deviation will increase, which, as the formula implies, will actually decrease the VAR.

Any perspective on this?



Edited 1 time(s). Last edit at Tuesday, May 10, 2011 at 07:21PM by Common_Sense.

ll11

Writing this thread helped me understand what i was missing. I will give myself an answer.

VAR in the formula is always negative, i.e. R<z*st dev. So when you increase R you actually decrease VAR, and when you increase standard deviation you increase VAR.

justin88

you are right , you have uncommon_sense

nannan66

this took me forever to understand. really ticked me off. definitely seems like something that will show up in 24 days



Edited 1 time(s). Last edit at Wednesday, May 11, 2011 at 03:06PM by SkipE99.