Standard deviation vs VAR

[sfad]

Question says: standard deviation is more useful than VAR in evaluating new managers and new portfolio strategies. Correct or incorrect?
Answer: standard deviation typically requires several years before the managers return history is available, which limits its use in determining the effectiveness of new managers and strategies.
Can someone please explain why standard deviation requires several years before manager return history is available?

 

[MrSmart]

If you want to use the standard deviation of returns as the measure of the new managers risk, then you need to have data for it.
Since they are new, then you cannot derive a standard deviation of returns that never happened.
However, I do not think VAR is appropriate either for the same reasons, unless you somehow estimate the standard deviation, either through holdings’ history, or peer comparision, but this isn’t mentioned in the material AFAIR.

 

[sfad]

MrSmart wrote:
However, I do not think VAR is appropriate either for the same reasons, unless you somehow estimate the standard deviation, either through holdings’ history, or peer comparision, but this isn’t mentioned in the material AFAIR.

Exactly, how can VAR be more effective when it also requires previous returns?

 

[cipherap15]

Var can calcuated numeours ways like Variance-Covariance method, Historical and Monte Carlo which requires no history.

 

[MrSmart]

cipherap15 wrote:
Var can calcuated numeours ways like Variance-Covariance method, Historical and Monte Carlo which requires no history.

They all do.
The difference is, historical methods use the historical distribution. While the rest still need standard deviation as inputs (or any other measure of dispersion).
Hope someone can clear things up better than I can.

 

[onlysimon]

its a very strange question.
if I were a selling a 60/40 strategy as a new manager, then i cound be asked.
1) what is the standard deviation of your strategy?
I would take last 25yrs MSCI FI & EQ data, calculate the correlation and then calculate the expected std.dev.
2) what is the value at risk?
take the same data, pick out the worst 5% of months and state the VaR.
what i think the question could be asking, is if rather than being NEW new. the manager is 3-5yrs new. so maybe VaR is more meaningful than std dev?

 

[sfad]

Any other explanations as to why VAR is more useful than standard deviation in evaluating new managers and new portfolio strategies? I don’t see how standard deviation requires several years before the managers return history is available?

 

[cpk123]

what happened to all the Quant you studied in Levels 1 and 2?
How is standard deviation calculated - can you go back to basics and then decipher whether you are on the right track when you state

Quote: I don’t see how standard deviation requires several years before the managers return history is available?

 

[MrSmart]

cpk123 wrote:
what happened to all the Quant you studied in Levels 1 and 2?
How is standard deviation calculated - can you go back to basics and then decipher whether you are on the right track when you state

Quote: I don’t see how standard deviation requires several years before the managers return history is available?

That still doesn’t answer the OP, how does a VAR measure risk better than SD for a new portfolio manager?

 

[onlysimon]

my answer is now ‘VaR position limits’.
i.e. the manager has no history, and little clue what they will actually do, so the only choice is notional limits, actual $ limits or VaR limits.
..but then VaR limits come with a huge caveat, that they are as only as good as the calculation method.