Value at Risk Calculation for an Equity Portfolio

Very Hard Risk Management Applications Value At Risk

A portfolio manager is analyzing the risk exposure of an equity portfolio with total assets valued at $10 million. The portfolio consists of various stocks from different sectors, and the manager is utilizing Value at Risk (VaR) to quantify the risk.

The manager estimates that the expected return on the portfolio is 8% with a standard deviation of returns of 15%. Using a parametric approach to calculate 1-day VaR at a 95% confidence level, which of the following statements correctly describes the outcome of this calculation?

The 1-day VaR at a 95% confidence level is approximately $725,000, indicating that there is a 5% chance the portfolio could lose more than this amount in one day.

The 1-day VaR at a 95% confidence level is approximately $497,000, suggesting that the portfolio is relatively low risk with only a 5% chance of a larger loss.

The 1-day VaR at a 95% confidence level is approximately $1,500,000, highlighting a significant risk exposure for the portfolio.

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