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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.


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.