Question

Suppose that the stock return follows a normal distribution with mean 20% and standard deviation 40%. What is the 5% VaR (value-at-risk) for this stock

Answer 1

The 5% VaR (value-at-risk) for this stock 0.858

Step-by-step explanation:

Value at risk determines the value of the investment at risk of loss. It shows how much of the investment might lose in the given market conditions.

Now deter,ine the value at risk formula

Var = Mean + Standard Deviation x Z score value

Where

Mean = 20%

Standard Deviation = 40%

Z score value = Z Score at significance 5% = 1.645

Placing values in the formula

Var = 20% + 40% x 1.645

Var = 0.2 + 0.4 x 1.645

Var = 0.2 + 0.658

Var = 0.858