tailieunhanh - Financial Modeling with Crystal Ball and Excel Chapter 10

CHAPTER 10 Value at Risk any times one wants to know for planning purposes what is the ‘‘worst that can happen.’’ In many situations, the worst that can happen is to lose one’s entire investment; however, this usually has an extremely low probability of occurrence. | 10 Value at Risk Many times one wants to know for planning purposes what is the worst that can happen. In many situations the worst that can happen is to lose one s entire investment however this usually has an extremely low probability of occurrence. The concept of Value at Risk VaR was devised to obtain a risk measure that associates a severe loss with a probability level of reasonable interest to the decision maker such as 1 percent or 5 percent. See Jorion 2001 for more about VaR. In this chapter we see how to use Crystal Ball to find VaR and a related measure Conditional VaR CVaR . VAR In practice we can think of a potential loss L as the worst that can happen if the probability of losing L or more during a selected time period is a specified amount such as 5 percent. In that case L is called the 5 percent Value at Risk VaR . More precisely let R denote the total return in dollars on an investment I and let c denote the a percentile of the distribution of R. Then the a percent VaR is defined as L I c. Figure shows a segment of the one-year Crystal Ball model in PortfolioVaR. xls which is adapted from the file described in Chapter 9. The potential loss from investing in the portfolio I R is measured directly in cell B11 with the Excel formula A4-A11 which is simply the difference between the initial investment and the final value of the portfolio. A copy of the forecast window for this quantity is shown at the bottom of the spreadsheet segment in Figure . Because the certainty is 95 percent that portfolio loss is between Infinity and we say that the 5 percent VaR for one year is . Note that when we find the a percent VaR from the loss I R distribution we use the 1 a percentile in the upper tail rather than the a percentile c in the lower tail of the distribution of R. VaR is used by regulators to compute capital requirements for financial institutions and by managers as an input to risk-management decisions. VaR can also be .