Asset Allocation - Babb Q5 on VAR

[vida_blue]

This is about Q5 of the Asset Allocation - Babb item set on the CFA web site.
We’re given a chart that shows probability distribution of fund returns.
It also provides the mean annual fund return and the fund return volatility.
The answer key uses the probabiliy distribution chart to solve, which I understand.
However, why can’t I also use the provided return and volatility to calculate the answer with:
[annual return - 1.65 (volatility)] x fund amount
Sure I’m missing something obvious but am traveling and don’t have books with me. Thanks.

 

[hei.so]

What kind of VaR is it asking for? Historical or analytical (variance-covariance)?
If it is analytical, then you would use the formula. If it is historical, then you would use the chart.

 

[vida_blue]

Good point hei.so. Interestingly it doesn’t make the distinction in asking for either historical or analytical.
Re-reading the text, it does say that:
“Although Babb, Downing, and Lockwood believe that future expected fund returns can be based on the historical average (as shown in Exhibit 1), future annual volatility cannot.”
So I guess that should have been my prompt to not use the annual fund return volatility and instead look at the historical distribution.