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Reasons Value At Risk is difficult to use for portfolios containing options:

Therefore without the assumption of normal returns it is difficult to estimate VaR.

It is also difficult to calculate covariance between two options or an option and the underlying.

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To go from a monthly VAR to a weekly VAR you must:

  • Multiply monthly expected return by 12 then divide by 52.
  • Multiply expected standard deviation by √12 then divide by √52
  • Finally 5% VAR = Expected Return – 1.65 (Standard Deviation)
  • Or 1% VAR = Expected Return – 2.33 (Standard Deviation)

To go from a yearly VAR to a monthly VAR you must:

  1. Divide expected monthly return by 12.
  2. Divided expected monthly standard deviation by √12
  3. Then calculate VAR as: Expected Return – n(standard deviation)

with n being 1.65 for a 5% VAR and n being 2.33 for a 1% VAR.

 

Credit risk in a forward contract is assumed by:

The party to which the market value is positive.

Return over Maximum Drawdown (RoMAD)

Is simply the average return in a given year that a portfolio generates, expressed as a percentage of the largest difference between a high-water point and a subsequent low aka the maximum drawdown.

Risk-Adjusted Return on Capital (RAROC)

The expected return on an investment divided by a measure of capital at risk.

Performance Stopouts

A performance stopout is the maximum amount that a given portfolio is allowed to lose in a time period.

Performance netting risk occurs online in…

…multistrategy, multimanager environments and only manifests itself when individual portfolio managers within a jointly managed product generate actual losses over the course of a free-generating cycle (usually a year).

Basically some managers lose capital others make money and charge performance fees which combined with the losses results in a net loss for a jointly managed product (fund).

ESG risk

The risk to a company’s market valuation resulting from environmental, social, and governance factors.

Managed futures are often considered a subgroup of:

Global Macro Hedge Funds

Because both strategies attempt to take advantage of systematic moves in major financial and nonfinancial markets.