Value at risk is a measure in risk management to measure the potential risk which can occur to the portfolio of an investor. VaR imputed at 5% confidence means that the loss will not be less than predicted value 95% of the time or, in other words, loss will be greater in 5% of times than predicted value.

There are three common ways of computing value at risk:

  • Parametric VaR
  • Historical VaR
  • Monte Carlo VaR

In this section, we will be capturing the first two, and the third one will be captured in the next section.

Parametric VaR

Parametric VaR is also known as the variance-covariance method and is used to find VaR using mean and standard deviation as parameters.

qnorm is used for value at risk calculation using parametric methods. It uses the parameters ...

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