The Monte Carlo Method uses simulations to calculate the VaR. Off-market factors can increase price volatility, which results in the normal distribution curve being out of sync with actual market movement. The danger of using the variance-covariance method and consequently the normal distribution curve, is that the normal distribution may not be realistic. With the normal distribution curve formed it is fairly easy to say the probability of a certain return occurring. This will also limit the work hours invested in calculating the VaR. Whereas the other methods require far more historical data and calculations, the variance-covariance method requires only the expected average return and its standard deviation. It is the easiest method for calculating VaR. The advantage of using a normal distribution curve is that it gives a clear overview of the most likely return on an asset. Similar to the historical method, the variance-covariance method calculates the probability of a return occurring and creates a normal distribution graph based on this data. These two factors can be combined to create a normal distribution curve. This requires estimating the expected (or average) returns and standard deviation. The variance-covariance method is based on a normal distribution of returns. For now, let’s look at the various methods of calculating VaR. The information generated by this module can prove critical in your risk management activities and help you make decisions concerning your risk exposure.įor more information on the VaR module of Agiblocks, please contact us directly or request a demo to take full advantage of all Agiblocks has to offer, without any obligation. ![]() Agiblocks provides an integrated Value at Risk (VaR) module, which can calculate your value at risk based on your entire portfolio or a selection of your portfolio. There are three different methods for calculating VaR where each method has different strengths and weaknesses. Furthermore, it can aid in making the decision whether the loss is acceptable considering the potential profit made on the investment. This element must be considered before making an investment, to determine what this maximum loss may do to a trading account. This is a crucial one, because it indicates what the worst-case scenario would be, should the risk become reality. The third element is the expected maximum loss.
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