VaR

This is the way I teach this - This is all you need to know for the exam.

 VaR = Standard Deviation x the Z score.

The standard deviation is how much the members of a group differ from the mean (average) value for the group. You will not be required to calculate this in your exam.

To calculate the Z score of a particular confidence level we take the confidence level, in this case, 95% and takeaway 50 (this is because we are just looking at one side of the standard distribution (the amount that is over or under the average). This equals 45. So for a 95% confidence, we’re looking for a value in the body of the table of 0.45.

As you can see in the screenshot here, this will lie exactly halfway between the two values I’ve highlighted (0.4495 and 0.4505)

As these figures are in row 1.6 we get 1.645

 So assuming the standard deviation (always given) is $2m then the VaR is 1.645 × $2 million = $3.29 million.

 If we are asked to find the 8 years VaR we don't multiply the $1.72 by 8 as you would think. But we multiply it by the square root of 8.

On your calculator this is the same as (8^0.5) means the square root of eight. (i.e. the n-period VAR = the one-period VAR x n^0.5).

So for 99% VaR we get 99-50= 49. Look up .49 in the body of the table we get column 0.03 and row 2.3 so the Z score for a 99% VaR is 2.33.