Advantages/Disadvantages of VAR

[deriv108]

Little doubt that VAR could show up in the exam. Advantages/Disadvantages of VAR?
Not in the schweser notes.

 

[gjertsen]

Sure it’s in the Schweser Notes.
From memory:
Advantage would be being able to compare and combine very dissimilar asset classes or business units with (depending on the method of calculation) no assumption of distribution normality.
Disadvantage is primarily that it doesn’t provide any sense of the shape of the distribution exceeding the VAR loss.

 

[june2009]

Variance method
advatage = computationally simple for small firms
disadvantage = lossses could be much larger than forecasted
Historical method
advantage = useful of returns are non-normally distributed
disadvatage = assumes past performance is good indicator of future; need a lot of historical data
Monte Carlo method
advantage = robust
disadvatage = computationally complex

 

[goodman2011]

VAR
advantages
easy understood by managers
accepted standard to report
disadvantages
difficult to estimate
misleading as if risks controlled
understate frequency and magnitude of exteme loss

 

[dpcfa]

the sharpe ratio also does not appear anywhere in the schweser notes. could someone please enlighten me as to this obscure and rarely mentioned formula?

 

[Soccertom9]

I think its with the left out notes on IPS…….
Give the guy a break! There is a lot of curriculum to cover and the exam is a week away!

 

[big ML]

VAR blows. Live it. Learn it. Know it.

 

[DD87]

KNOW THESE
DISADVANTAGES;
- VAR can be difficult to estimate, and thus different estimations will give different values.
-Gives a false sense of security that the risk is properly measured.
-underestimates the magnitude and frequency of the worst returns.
- Fails to incorporate positive results in its risk profile.
- Accurate VAR estimate can be difficult to estimate for complex firms.
ADVANTAGES:
- Can be easily understood by managers.
- versatile