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ACCA AFM · Guided practice (Show me how)

Chapter 10: Risk and Uncertainty

Value at risk over one year and a project's life

James has estimated an annual standard deviation of $750,000 on one of its projects, based on a normal distribution of returns. The average annual return is $2,400,000.

Estimate the value at risk (VaR) at a 95% confidence level for one year, and also over the project's life of six years. For 95% confidence the VaR is 1.645 standard deviations from the mean.

  1. One year

    Calculate James's one-year value at risk and the return James can be 95% certain of achieving in one year.

  2. Six years

    Calculate the standard deviation and value at risk over James's six-year project life, and the total return James can be 95% certain of achieving over six years.

Opening this exercise…