Parametric approach assumes that portfolio return follows a known distribution, such as normal distribution, lognormal distribution, and etc. Standard deviation (SD) is taken as the dispersion parameter which takes into account all observations. Any large value will affect the value of volatility in essence SD.
The most common model employed in practice is delta-normal distribution which utilizes both the expected return and standard deviation of returns in which case, VaR can be calculated by using SD(σ):
VAR(α%)=-μ+σ×z_α
Limitations of parametric approach include: The need to assume a known distribution. For delta-normal method, it assumes the normality of the distribution of returns. However, most assets exhibit skewed return distributions, and fat tails. With fat tails, the
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This approach cannot work appropriately for assets with nonlinear relationships, such as options. Options do not have stable volatilities which could lead to misstated VaR.
4.3 Monte Carlo Simulation Approach
Monte Carlo simulation approach is the most powerful and flexible approach which involves assuming a particular distribution specified by the user, using computer software to draw random samples from the distribution and generating an enormous amount of outcomes. The selected outcomes will naturally form a distribution, which will approximate the normal distribution. VaR is calculated in the same way as with the delta-normal approach by using the expected mean, and volatility generated by Monte Carlo approach (Kaplan, Inc., 2014).
Disadvantages of Monte Carlo simulation approach include: It is subject to the professional knowledge and skills of the user who will input the initial distribution. This model will base on the subjective opinions of the user. As a result, it is impossible to construct a perfect
Technical eclecticism has the potential to describe detailed changes within the therapy. The changes throughout the process will match the appropriate intervention that helped the client change. With more than one approach, therapists are more likely to get the full understanding of what happen with the client and if the issue being resolves. But, the cons of the factor go back to misjudging/ misdiagnosing the patient from another patient with the same symptoms in the pass (Lampropoulos, 2000). Lampropoulos (2001) address some advantages and disadvantages of assimilative integration. The main advantage allow therapist to practice within their own belief without losing the benefits of the effective techniques in other approaches. Therapist can rearrange their techniques to eliminate frustration and provide the effectiveness techniques to resolve the issue. Also, the continuation of guided practice and research will provide the therapist with the proper knowledge to work with diverse clients. An disadvantage is increasing the number of psychotherapies that would bring more confusion and therapist with unfamiliar knowledge of the appropriate issue (Lampropoulos, 2001). With the theoretical integration, there is more than one approach to use in a given situation. A disadvantage is focusing on one specific disorder than doesn’t correspond with another approach. Being able to use more than one approach within a disorder provides a better understanding of the situation
Answer: The standard deviation can be calculated by subtracting the expected return from the actual return for each year and squaring the results. The squares are summed, and divided by the number of observances minus 1. The square root of that result is the standard deviation.
Theoretically from the recorded data the calculated mean, median, and mode will be the most accurate representation of the real world value. The difference between the highest recorded value and lowest recorded value is the range in the set of data. Standard deviation (s) is a quantity calculated to indicate an extend of deviation for a group of data as a whole (Marshall). This is calculated using:
The idea of “risk” is used in many fields and industries. There has been large efforts made towards the understanding of risk. Since, risk varies so much depending on the field of study, the need for learning about it is warranted. As can be imagined, the importance of risk in a market economy is crucial. In the 1990s, JP Morgan made the Value at Risk (VaR) a central component of its work efforts (Cecilia-Nicoleta, Anne-Marie, & Carmen-Maria, 2011).
Standard Deviation for the mean column is 0.476Standard Deviation for the median column is 0.754Standard deviation for the mean column has least variability
In the backtesting approach there are two test used in this case for calculation of VAR. First test is known as the proportion of failure or un-conditional coverage and
The primary difference(s) between the standard deviation and the coefficient of variation as measures of risk are:
spread of scores from the mean (Burns & Grove, 2007). The larger the value of the standard deviation for study variables, the greater the dispersion or variability of the scores for the variable in a
26. Suppose Stock A has had a mean price of $6.58 per share with a standard deviation of $1.88, while Stock B has had a mean price of $10.57 per share with a standard deviation of $3.02. Which stock shows a higher coefficient of variation or volatility?
Portfolio Standard Deviation, of a portfolio with two stocks (Stock A and Stock B) is given by following formula:
22) The variance of a random variable is computed by multiplying each possible value of the variable by its probability and summing these products. TRUE
One is that since the ten portfolios are grouped according to their performance, portfolios are usually made up by similar stocks and thus cannot diversify the risks. The other is that both skewness and kurtosis have effect on the risk a stock bears and thus cause the pattern of variance.
Simulation is a computer process that gives a probable NPV or IRR for a project. All factors that affect the project’s returns are input. The computer then randomly selects one observation from each category. All of the observations are combined and the NPV or IRR is calculated from those figures. Simulation gives a range of outcomes as well as the probability of the outcomes. It provides the total risk level of a project.
Parametric protection is a sort of protection that does not repay the immaculate misfortune, but rather ex stake consents to make an installment upon the event of an activating occasion. The activating occasion is frequently a disastrous regular occasion which may usually accelerate a misfortune or a progression of misfortunes. Be that as it may, parametric protection standards are likewise connected to Agricultural yield protection and other ordinary dangers not of the way of fiasco, if the result of the danger is associated to a parameter or a list of parameters.
In statistics, variance refers to the comparison of the means of more than two groups. The term "variance may mislead some students to think the technique is used to compare group variances. In fact, analysis of variance uses variance to cast inference on group means...Whether an observed difference between groups mean is 'surprising' will depends on the spread (variance) of the observations within groups. Widely different averages can more likely arise by chance if individual observations within groups vary greatly" (Analysis of variance. 2012, Stat Primer). Variances indicate the presence of change or the existence of a statistically significant difference between two groups being compared.