VAR anlisis

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What Is Value at Risk?

Value at Risk or VaR is the statistical technique used to measure and quantify he level of financial risk within a firm or investment portfolio over a specific time frame. In other words, is the maximum level of loss that will not be exceeded with a specified level of confidence. Value at risk is used by risk managers in order to measure and control the level of risk which the firm undertakes. The risk manager's job is to ensure that risks are not taken beyond the level at which the firm can absorb the losses of a probable worst outcome. VaR has five main uses in finance: risk management, risk measurement, financial control, financial reporting and calculation of regulatory capital.

The main advantages are that VaR captures important aspects of risk in a single number, it is easy to understand and also ask to the question: “How bad can things get?”. The main formula of Value at Risk is given by:

Vo α σ

Where:

• Vo: is the initial value of the asset or portfolio
• α: is the number of standard deviations below the mean corresponding to the 1-C quantities of the standard normal distribution or the level of confidence.
• σ: standard deviation or risk of the assets daily returns.

Purpose of the analysis

The main objective of the next project is to analyze an investment portfolio made up of two different assets including the correlation as close as possible to -1. Which will have a duration of 252 trading days, from October 2014 to October 2015. The value of the portfolio should be $ 100,000 with a confidence level of 95%, so as to estimate the respective Value at Risk. Also, the point of balance or prefect proportion between the two assets to minimize VaR.

The first step in this analysis is to find two companies that their correlation is less than zero. It is important to know that the correlation in the financial world is the sense and magnitude between two active, this means that is how two securities move in relation to each other; It’s represented by the symbol ρ (rho) and which ranges are measured -1 and 1. When a correlation approaches -1 in a portfolio, it is said to be a good investment alternative. Correlation is calculated by:

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After trying with different stocks, I found an example of a negative correlation in the established time, the companies are Google (Alphabet) and The Walt Disney Company.

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A recommendation to find a negative correlation is looking for companies which activities are in different industries. A negative correlation graph should show a negative slope. In the present analysis the obtained correlation is equal to -0.11177 and it is represented in the graph as follows:

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Risk diversification is an important measure that applies today to deal with the volatility of the assets. Diversification may not be a complete insurance against any economic disaster of global dimensions, but protects us against random events in the market. The risk of the assets is estimated with the standard deviation, but first we must calculate the return of stocks by multiplying the natural logarithm by division of the value of assets between the value of the previous day. or it may be better understood with the following formula:

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