LO 67.1: Define, calculate, and distinguish between the following portfolio VaR

LO 67.1: Define, calculate, and distinguish between the following portfolio VaR measures: individual VaR, incremental VaR, marginal VaR, component VaR, undiversified portfolio VaR, and diversified portfolio VaR.
Professor’s Note: LO 67.1 is addressed throughout this topic.
D iv e r s if ie d Po r t f o l io Va R
Diversified VaR is simply the VaR of the portfolio where the calculation takes into account the diversification effects. The basic formula is:
VaR = Z x a x P
e p
p
where: Z = the ^-score associated with the level of confidence c Op = the standard deviation of the portfolio return P = the nominal value invested in the portfolio
C
2018 Kaplan, Inc.
Page 73
Topic 67 Cross Reference to GARP Assigned Reading – Jorion, Chapter 7
Examining the formula for the variance of the portfolio returns is important because it reveals how the correlations of the returns of the assets in the portfolio affect volatility. The variance formula is:
Op2 =
N
i=l
N N
+ 2 y ^ y ^ w iw ipiia ia i
i=l jja iCTj
\ i=l
i=l j

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