SS14 Risk Management

What are the 8 common risk in a centralized risk management system or ERM?

(MLC - SOMRS) 1. Market risk - financial 2. Liquidity - financial 3. Credit Risk - financial 4. Settlement risk - non financial 5. Operations risk - non financial 6. Model risk - non financial 7. Regulatory risk - Non financial 8. Sovereign risk

A portfolio manager determines that his portfolio has an expected return of $20,000 and a standard deviation of $45,000. Given a 95% confidence level, what is the portfolio's VAR?

The expected outcome is $20,000. Given the standard deviation of $45,000 and a z-score of 1.65 (95% confidence level for a one-tailed test), the VAR is -54,250 [= 20,000 - 1.65 (45,000)].

Why is VAR incomparable across managers?

VAR is relatively incomparable across managers due to its inherent model risk. For example, two people can be given an assignment to compute the VAR for the same underlying asset and the results will likely be different due to the use of different methodologies and model assumptions. Neither answer is necessarily wrong. The bottom line here is that peer group evaluation using VAR is not very useful unless one can be sure that the same VAR techniques and assumptions are used to evaluate all portfolios.

What is VAR used for?

VAR is used as an estimate of the minimum expected loss (alternatively, the maximum loss) over a set time period at a desired level of significance (alternatively, at a desired level of confidence)