Can you figure out of the value at risk is a measure that attempts to capture...

Can you figure out of the value at risk is a measure that attempts to capture the risk within a firm or investment portfolios. And the way of calculating value at risk assumes that daily returns are distributed according to a normal distribution and with high confidence of 95 percent, we can then calculate the value at risk as 1.65 standard deviations below the mean. That approach has been criticized following the financial crisis of 2008. Do you know the reasons why did it come like that?

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Expert Solution

"That approach has been criticized"

The approach here essentially refers to an assumption of the normal distribution of daily returns with respect to investment portfolios. In a scenario of abrupt financial upheaval such as the 2008 crisis, the smooth normal distributions literally go for a toss, and new parameters factor in which drastically contort the "situation" or mathematically speaking, the probability distribution of daily returns.

The confidence of 95 percent has to be based on the assumption of an overall distribution of expected gains and returns. That behaviour, under extreme circumstances may does not follow a rather meticulous normal behaviour, and hence it comes like that

orchestra answered 2 years ago

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