Return on Investment & Historical Simulation VaR

[Steve Jobs]

Hi, the first question in the questions set for "Dowd Chapter 3: Estimating Market Risk Measures : Calculate VaR using a historical simulation approach", seems to be about calculating the return on investment. I'm confused and can't see how the question is related to the topic covered in the study notes which is just sorting the data to find the corresponding confidence level.

Thanks,

 

[David Harper CFA FRM]

Hi @Steve Jobs That's a fair point: Dowd Chapter 3 starts with 3.1 Data which introduces the definitions of return data (including present value P/L). While the AIMs begin with estimating historical simulation (3.2), I recall writing the first two questions 68.1 and 68.2 because I do think Dowd 3.1 is (Returns) important. And I still totally do: the HS sorts returns, but it's too easy to assume the definition of "daily return."(In fact, it's fascinating with how much variety both the returns and the quantile can be approached).

I have tasked myself to revise (non-urgently) an introduction prior to the first Chapter 3 AIM, to reference Dowd's 3.1 (Returns); i.e., so the note synchs with the introduction. Thanks,

 

[Steve Jobs]

Thanks David,

 

[Steve Jobs]

Hey David,

I was reviewing the questions again and an statement in answer b of q 68.2 got my attention: "Geometric return over multiple periods is sum of one-period geometric returns". I understand if we have [P0=10, p1=11, p2=12] and [[D1=11, D2=12] and the q is asking for the whole period return, then: ln[ (p2+d1+d2)/p0) ] ?

Another confusion, in q 68.1, in calculation of R, is "interim dividend" paid at year end? would it make any difference if instead of "interim dividend", the question said just "dividend" or "year end dividend" ? what if it was semi-annual dividend, then we have to consider the timing while discounting?

May be the above questions are too theoretical, but considering the last exam, I realized I should pay attention to such variations.