Portfolio Risk Measurement Based On Value at Risk (VaR)

Generally, the risk level of an investment is directly correlated with the returns to be earned by investors in the future. In current situation, it is difficult for investors, shareholders and financial managers to determine the total loss of their asset portfolio because standard deviation is insufficient to describe the actual total loss. Therefore, this research discuss on the concept of Value at Risk (VaR) which has been proven as one of the risk measurement instrument that is effective in describing the total loss of investment in exact currency that will be bear by the investors. VaR is defined as the maximum potential loss in a value of a portfolio over a defined period for a given confidence interval in normal market condition. The three approaches which are Delta Normal, Historical Simulation and Monte Carlo Simulation are used to calculate VaR for a hypothetical portfolio of a stock. The study finally shows that Monte Carlo Simulation approach is the most applicable and flexible in measuring Value at Risk as compared to the other two methods.