What is Value at Risk? Is it useful to analyze our periodic loss after invested in any stock?

Answer 1

Value-at-Risk is a marketing tool that makes people think they understand risk -- but has very little value (if any).

To find VaR, look at the historical (or expected) distribution of returns. The VaR is the 5th percentile. For example, if you are looking at daily returns, the VaR will be the dollar loss at the 5th percentile. That is, on 95% of days, you will do better than that number and 5% of the time you will do worse.

It doesn't measure how much worse you will do 5% of the time, nor does it say anything about the reward you get for taking on risk. If returns are normal or lognormal, then VaR doesn'[t tell you anything more than you would know by knowing volatility.

It is a success, because it allows you to boil all your risk down to one simple number. It is a failure, because it boils all your risks down to one simple number.

In my opinion, it is worthless. However, Basil II accords require certain financial institution to report it.

Not everyone agrees with me. See the link below for other opinions.

Answer 2

Value-at-Risk (VaR) is a Risk Metric that states the maximum loss (in dollar or percentage terms) possible in a given time frame with a certain confidence level.

There are three ways VaR is calculated: Historical Approach, Variance-Covariance method and Monte Carlo Simulations. The Historical Approach plots the returns on a histogram, with the assumption that history will repeat itself. The Variance-Covariance method is not very different other than the fact that here, the returns are plotted as 'normally distributed'. The Monte Carlo method is essentially a set of random trials to calculate VaR.

Answer 3

Here is one thing to keep in mind about the Roth IRA account. There is never any tax on it where as there is on your 401k. This becomes important when considering your asset mix. Income producing investments are taxed at the full tax rate as will be your 401k. Hence it makes sense to invest at least some of your 401k in income producing assets--bonds, LPs, REITs. The income from each of those is taxed at the full tax rate anyway. Now since the Roth IRA is never taxed, it also makes sense to put those types of assets into the Roth IRA also. And also equity investments. What you neglected to mention are investments outside of these two vehicles. If you have some, they should be investments that would be taxed at the capital gains rate--equity investments. Actually, unless you are in the highest tax bracket it makes sense to have a portion of your equity investments outside of a 401k. By doing so your total tax bill will be decreased, especially if you are a long term investor. If you have the least hankering to invest some of your money in gold and silver those absolutely should be within a Roth IRA. Both are taxed as collectibles otherwise. Another thing to consider in regard to the 401k is that in future years the tax rate might actually be higher, perhaps much higher, than it currently is. Since you really have no choice of placing non-mutual fund investments within a 401k except for perhaps company stock, it certainly does make sense to invest Roth IRA money in company stocks rather than mutual funds. But be careful. It is very tempting for many to speculate with their Roth IRA account especially short term trading which otherwise would be taxed at the full tax rate. That would be a good way to reduce that value of the Roth account. Be just a little cautious. Invest in the likes of MCD, WMT, JNJ, BDX, KO, etc. Or maybe ETP with its 8% dividend or PAA with its 7.5% dividend. And do not invest it in fewer than 5 different companies.