Convert Tracking Error Var
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in 'P2.T5. Market Risk (25%)' started by David Harper CFA FRM, Aug 21, 2007. David Harper CFA FRM David Harper CFA FRM (test) Lee just asked me about relative VaR as discussed in this fine article: http://www.financewise.com/public/edit/riskm/rmforinvestors/rmforinvestors-models.htm tracking error formula excel . His question here: "Dear David- I am currently studying for 2007 FRM exam and trying annualised tracking error to read articles as to VAR and other FRM-related articles. In last weekend, I found one interesting article (please refer the following link) tracking error formula cfa but I couldn't’t figure out how those figures came up with. http://www.financewise.com/public/edit/riskm/rmforinvestors/rmforinvestors-models.htm Can you take a look at Table F (Performance year to date 2000, Jan 1-Oct 25) and Table G (Relative VAR) and teach me how to
Tracking Error Interpretation
calculate those figures? I tried numerous different approach but couldn't’t figure out the methodology methodology by now." Lee - While this is a good article, I recommend you avoid it in favor of the assigned readings: Linda Allen Chapter 1 for VaR (but also Jorion, of course) and Noel Amenc Chapter 4 for Tracking Error. Just to be pragmatic. The problem is that, for both of these terms (relative VaR and tracking error), people can have different definitions. tracking error volatility As your article does. So, I didn't check the calculations, but here is some high-level help (I hope): Relative versus Absolute VaR For our purposes (the exam), relative VaR refers to VaR relative to the expected value of the portfolio. Absolute VaR refers to VaR relative to zero. So, if you start today with portfolio value of $100, expected annual return of 10% and (annualized) standard deviation (of returns) of 10%, the one-year 95% RELATIVE VAR = ($100)(10%)(-1.645) = -$16.45. The one-year 95% ABSOLUTE VAR = ($100)[(-1.645)(10%)+10%] = -$6.45. See the difference? At the end of the year, we expect the portfolio to grow to $110. But $16.45 is "at risk." Relative VaR is the full $16.45 and Absolute VaR, giving credit to the gains that theoretically relate to the risk, speaks to loss versus initial value. Another way to view it: either way, our 1-year 95% VaR (note how i am careful to qualify the VaR with both a time horizon and a confidence level, because there is a different VaR for different combinations of time & confidence) says the risk is a final value of $93.55. The difference is whether we count the loss relative to where we started ($100) or where we expect to end ($110) Tracking error Tracking error has two definitions in practice. Some mean the difference between portfolio return and the benchmark (e.g., S
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Relative Var Tracking Error
McAfee on the IoT & Secure Smartphones Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam http://www.bionicturtle.com/forum/threads/relative-var-tracking-error.8/ Simulator Stock Simulator Trade with a starting balance of $100,000 and zero risk! FX Trader Trade the Forex market risk free using our free Forex trading simulator. Advisor Insights Newsletters Site Log In Advisor Insights Log In How To Convert Value At Risk To Different Time Periods http://www.investopedia.com/articles/04/101304.asp By David Harper Here we explain how to convert one value at risk (VAR) of one time period into the equivalent VAR for a different time period and show you how to use VAR to estimate the downside risk of a single stock investment.Converting One Time Period to AnotherIn Part 1, we calculate VAR for the Nasdaq 100 index (ticker: QQQ) and establish that VAR answers a three-part question: "What is the worst loss that I can expect during a specified time period with a certain confidence level?" Since the time period is a variable, different calculations may specify different time periods - there is no "correct" time period. Commercial banks, for example, typically calculate a daily VAR, asking themselves how much they can lose in a day; pension funds, on the other hand, often calculate a monthly VAR. To recap briefly, let's look again at our calculations of three VARs in part 1 using three different methods for the same "QQQ" investment: * We do not need a standard deviation for neither the historic
FINANCE & BANKING Accounting Banking Behavioral Finance Commentary Current Affairs Education for Practice Ethics Hedge Funds Interviews Investing Law & Compliance Real Estate Research Overviews Risk Sustainable http://post.nyssa.org/nyssa-news/2010/05/a-primer-on-value-at-risk.html Investing WORLDVIEW Worldview Map Brazil Egypt India Indonesia Mongolia North Africa Peru The Philippines Romania Russia South Africa Turkey Vietnam CAREER NEWS Career News Jobs Feed CFA PREP TIPS BOOK REVIEWS ABOUT US About Us Staff Submissions NYSSA Events Archives SUBSCRIBE Email RSS Feed Past Editions ADVERTISE Media Kit « Your Track Record and Compliance History Are Your Franchise | Main | Recent Research: tracking error Highlights from May 2010 » 05/04/2010 A Primer on Value at Risk Click to Print This Page Value at risk, or VaR, is viewed by some as a massively important measure. It is unique in how it characterizes risk. Most measures show risk either as a percentage (as standard deviation and tracking error do) or in units (as the Sharpe and Treynor risk-adjusted measures tracking error formula do). VaR shows risk in terms of money—that is, the money that might be lost. The main purpose of VaR is to assess market risks that result from changes to market prices. VaR assesses risk by using standard statistical techniques that are routinely used in other technical fields. It can be viewed formally as measuring the worst expected loss over a given horizon at a given confidence level (Jorion 2001). We will explain more about this shortly. To many, VaR sounds like a complex method to evaluate risk. This is due, perhaps, to the approaches that are used, which often sound complicated; this article hopes to make these less perplexing. In addition, how VaR is expressed is unique, which perhaps is why some find it difficult to understand. There are three key characteristics of any VaR statistic: Money amount Time frame Confidence level For example, we might say that a portfolio’s VaR is $1 million, over the next week, at a confidence of 95%. This means that there is a 95% chance that the most we can lose over the next week is $1 million. Can we lose more? Ye