# Value at Risk

Posted in Operations and Supply Chain Terms, Total Reads: 2195

## Definition: Value at Risk

Value at Risk makes an assessment of maximum possible loss under normal  market conditions over a given interval of time. It takes into consideration a confidence interval of a normal occurrence. It is usually taken to be 95% which accounts for worst possible losses only during 5% of the time horizon. It can be applied to

A) Individual Assets

B) Portfolio of Assets

Formula:

Individual Assets :  VAR= V(1-er *)

Where r*=   z*sigma  + u*

Example :

For an initial investment of Rs 50,000 for one month . Calculate the value at risk  for 200 houseolds having u=0.0089  and  standard deviation of 0.0718 . The given confidence interval is 95%

Var = 50,000( 1- e-r)

r=1.96 * 0.0718 + 0.089 = 0.22978

VAR = 50,000( 1-e.23)

=   50,000(1-1.25)

=   50,000(.25)

=   12,500

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