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GDB:
A portfolio manager is considering making investment in ABC Limited. In order to calculate the risk of his investment he used Variance, Standard Deviation and VaR (Value at Risk) tools as a measure of risk. What do you think which one of the above mentioned tools is the most effective in calculating the risk of an investment and why?
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MGT411 GDB Solution Spring 2012
See the attached file please
apke khyal me VaR most effective risk of investment hy?
GDB:
A portfolio manager is considering making investment in ABC Limited. In order to
calculate the risk of his investment he used Variance, Standard Deviation and VaR
(Value at Risk) tools as a measure of risk. What do you think which one of the above
mentioned tools is the most effective in calculating the risk of an investment and why?
SOLUTION:
What investors really want to know is not just how much an asset deviates from its
expected outcome, but how bad things look way down on the left-hand tail of the
distribution curve. Value at risk (VAR) attempts to provide an answer to this question.
The idea behind VAR is to quantify how bad a loss on an investment could be with a
given level of confidence over a defined period of time.
Definition of 'Value at Risk - VaR'
A technique used to estimate the probability of portfolio losses based on the statistical
analysis of historical price trends and volatilities.
For example, the following statement would be an example of VAR: "With about a 95%
level of confidence, the most you stand to lose on this $1,000 investment over a two-year
time horizon is $200." The confidence level is a probability statement based on the
statistical characteristics of the investment and the shape of its distribution curve
VaR is commonly used by banks, security firms and companies that are involved in
trading energy and other commodities. VaR is able to measure risk while it happens and
is an important consideration when firms make trading or hedging decisions.
kia ap ka kahyal main ya 100% correct ha
Post type:- Gdb,
Description:- Total Marks: 2
Starting Date: Tuesday, April 17, 2012
Closing Date: Friday, April 20, 2012
GDB:
A portfolio manager is considering making investment in ABC Limited. In order to
calculate the risk of his investment he used Variance, Standard Deviation and VaR
(Value at Risk) tools as a measure of risk. What do you think which one of the above
mentioned tools is the most effective in calculating the risk of an investment and why?
SOLUTION:
What investors really want to know is not just how much an asset deviates from its
expected outcome, but how bad things look way down on the left-hand tail of the
distribution curve. Value at risk (VAR) attempts to provide an answer to this question.
The idea behind VAR is to quantify how bad a loss on an investment could be with a
given level of confidence over a defined period of time.
Definition of 'Value at Risk - VaR'
A technique used to estimate the probability of portfolio losses based on the statistical
analysis of historical price trends and volatilities.
For example, the following statement would be an example of VAR: "With about a 95%
level of confidence, the most you stand to lose on this $1,000 investment over a two-year
time horizon is $200." The confidence level is a probability statement based on the
statistical characteristics of the investment and the shape of its distribution curve
VaR is commonly used by banks, security firms and companies that are involved in
trading energy and other commodities. VaR is able to measure risk while it happens and
is an important consideration when firms make trading or hedging decisions.
The most effective tool in calculating the risk of any investment is Standard Deviation because it is measured in the same units as the payoffs (that is , dollars and not squared dollars) The Standard Deviation is square root of variance and easy to calculate The Standard Deviation can then also be converted into percentage of the initial investment ,providing a base line against which we can measure the risk of attentive investment's Given a choice between two investments with the same expected payoff, most people would choose the one with the lower standard deviation because it would have less risk
mgt411 gdb solution is given in video lecture 11 VAR is the right ans of this gdb for more detail listen lecture 11 from 42:00 mint to onward.
plz listen it carefully so that u will be able to ans the gdb correctly .
Dear all Tehseen's recoomendation is very useful to answer GDB, must watch the video lecture and page 38 on handout to write your own answer, below is just an idea solution don't copy paste just make your own accordingly.....
Cheers...
When we’re going to invest the money in any trade the stakeholder should participate that money through measure the risk by scrutinizing all three given parameters to ensure that he’s going to invest his money at confidential side, because when you are going to invest certain amount you are considering the risk factor involving in the investment. In variance we calculate the probability weighted average of the squared deviations of the possible outcomes from their predictable value and in standard deviation the risk it is leisurely in the same units as the payoffs whereas sometimes we are less concerned with the spread of possible outcomes than we are with the value of the worst outcome, to evaluate this sort of risk we use a concept called “value at risk.” And value at risk is measures risk at the maximum potential loss, as we know that incase of any investment higher risk gives us higher margin of profit in return of our investment, so i think that to measure the risk involving in investment, value at risk is the best and suitable parameter to calculate the risk because investors really want to know is not just how much an asset deviates from its estimated outcome, but how bad things look way down on the left-hand tail of the scattering curve. Value at risk (VAR) attempts to provide an answer to this question.
The idea behind VAR is to calculate how bad a loss on an investment could be with a given level of confidence over a distinct period of time. (VAR) is able to measure risk while it happens and is an important deliberation when firms make trading or evading decisions.
what i got in the video lecture is that standard deviation and variance are used to measure risk for 2 different investments that weather we invest in company A or in company B
but VAR is used to measure risk within a specific investment and in GDB there is only 1 company is given for which we have to measure risk so that is the point for which we use VAR to measure risk in given situation.
this said by our teacher in the lecture 11
listen lecture 11 from 43:00 onward
what u people say about my point ?
am I right or wrong ?
plz correct if i am wrong.
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