What is Value At Risk?

Value at risk is the maximum possible loss of a financial asset (or portfolio of securities) within a certain future period of time with a certain level of confidence. The specific measurement value is defined as: the maximum possibility of a change in market value under a possible change in market conditions in a sufficiently long planning period. It is a statistical measure of the possible loss of an asset portfolio under normal market fluctuations. The value-at-risk analysis method can measure the complex market portfolio of different markets, different financial instruments, and the overall market risk of different business sectors. But the value-at-risk analysis method is based on historical data and assumes that the scenario will not change. ^[1]

Value at risk

Also known as

Value at risk

In actual work, although the "standard deviation" can reflect the degree of risk taken by an investment project, it is not convenient to compare with other schemes, so it is necessary to calculate the "standard deviation rate" ^[2] .

1. Determine the various expected returns of the investment project (represented by xi) and their possible probability (represented by pi), and calculate the "expected value" of future returns (represented by \ bar {e} v), and calculate Formula: Expected value of future returns

2. Calculate "standard deviation" (represented by ) and "standard deviation rate" (represented by r).

3. Investment risk value calculation formula: standard deviation rate

4. Determine the "risk factor" (represented by f): Generally, it should be determined according to the attitude of all investors in the industry to risk aversion, which is usually a function of the degree of risk.

5. Introduce risk factor to calculate the expected value of investment risk for the investment plan.

Formula for calculating the value of investment at risk:

Expected return on risk (rpr) = risk factor × standard deviation rate = f

Expected risk return (rp) = expected value of future returns × expected risk return rate / (time value of money + expected risk return rate)

Compare the expected value of investment risk with the value of investment risk required by the business:

If the expected value of the investment risk> the required value of the investment risk, it means that the risk of the investment plan is large, the return rate is small, and the plan is not feasible. If the expected value of the investment risk is less than the required value of the investment risk, it means that the risk that the investment plan takes is small, the return rate obtained is large, and the plan is feasible.

Calculation of required investment risk value:

Required return on investment = time value of money + required return on risk

Required return on risk = required return on investment-time value of money

Required amount of risk reward = expected value of future returns × required risk reward rate / (time value of money + required risk reward rate).