RiskServ

Parametric vs Non-Parametric VaR Value at Risk (VaR) is a common measure of tail risk in terms of a financial loss event. Understanding Returns The convention when computing these returns (as well as VaR) is to quote return loss- es as positive values. For example, if a portfolio is expected to decrease in value by $2 million, the commonly used terminology is "expected loss is $2 million" rather than "expected profit is –$2 million." Profit/loss data: Change in value of asset/portfolio, Pt, at the end of period “t” plus any interim payments, Dt. Arithmetic return : Assumption is that interim payments do not earn a return (i.e., no reinvestment ). Hence, this approach is not appropriate for long investment horizons. Geometric return : Assumption is that interim payments are continuously reinvested . Note that this approach ensures that asset price can never be negative. ...