T1.

1-IntroVaR: Single-asset VaR and Two-asset Portfolio VaR

Single-asset VaR (left-hand panel): if we assume normality, notice we only need four inputs (
Two-asset VaR (right-hand panel): Shifting from one asset to a portfolio of two assets, so we

scale up scale down

Single-asset delta normal VaR Single-asset delta normal VaR
Asset Value ($) $100.0 Asset Value ($)
Volatility, % 1.0% Volatility, %
Volatility period, Δt days 1 Volatility period, Δt days
Horizon, ΔT days 10 Horizon, ΔT days
Volatility, T-day period 3.16% Volatility, T-day period

VaR Confidence level, c 95.0% VaR Confidence level, c

Normal (one-tailed) deviate 1.645 Normal (one-tailed) deviate
Value at Risk (VaR), T-day, % 5.201% Value at Risk (VaR), T-day, %
Value at Risk (VaR), T-day, $ $5.201 Value at Risk (VaR), T-day, $

Expected return, per annum

Absolute T-day VaR, %
DT DT
s T2 = s Dt � sT = st
Dt Dt
only need four inputs (aside from an assumption about T = 250 trading days per year): value, volatility, horizon and confiden
io of two assets, so we also need correlation

$100.0
20.0%
250
10
4.00%

99.0%
2.326
9.305%
$9.305

10.0%
8.905%
atility, horizon and confidence level.

Two-asset delta normal Portfolio VaR

Portfolio Value ($) $200.0
Volatility, per annum 10.0%
Horizon (days) 1

Confidence level, c 95%

Normal (one-tailed) deviate 1.64

Asset A
Volatility (per year) 10%
Portfolio Weight (w) 50%
Individual VaR, per annum, $ $16.45
Individual VaR, horizon, $ $5.20

Asset B
Volatility 20%
Portfolio Weight (1-w) 50%
Individual VaR $32.90
Individual VaR, horizon, $ $10.40

Correlation (A,B) -

Portfolio volatility, per annum, % 11.18%

Portfolio VaR, per annum, % 18.39%
Portfolio VaR, annual, $ $36.78
Portfolio VaR, horizon, $ $11.63
Portfolio VaR, horizon, $ (same) $11.63
Asset has an individual $VaR, per annum = (%Weight * Portfolio $Value) * volatility * deviate
Apply the square root rule: multiply by SQRT(horizon/250), but his assumes i.i.d.

We need this to compute portfolio volatility. Imperfect correlation (< 0) implies that portfolio VaR < sum of individua
If correlation = 1.0, then and only then, will the sum of individual VaRs = portfolio VaR.
VaR < sum of individual VaRs!