Smitherspoon asks Stober if it would be possible to calculate the VAR for each individual portfolio manager as well as the overall Quality fund. Determine which of Stober's three responses is most incorrect.
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"VAR is a universally accepted risk measure because it can be applied to practically any investment and is interpreted effectively the same way in each case; it is either the minimum or maximum loss at a given level of significance or confidence. For me to calculate the delta-normal VAR, you will need to provide me with each manager's historical returns distribution and expected return, the time frame you wish to use, and the desired level of significance. I can then calculate VAR for each manager using historical standard deviations and expected returns."
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"We can calculate VAR using: the delta-normal method (also known as the mean variance approach), the historical method, or the Monte Carlo method. To calculate each manager's 95% VAR, all we would have to do is use standard deviations and expected returns to calculate 90% confidence intervals."
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"Because of the way it is calculated, individual mean-variance VARs can probably be calculated for each of our portfolio managers, regardless of their style or assets under management. The overall fund VAR is then the sum of the individual VARs. To calculate the fund VAR directly, we would have to measure the fund's overall expected return and standard deviation. The problem with calculating it directly like this, however, is that to calculate the fund standard deviation we must consider the correlations of the managers' returns."
A. Response 3.
B. Response 2.
C. Response 1.
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