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John Moffat.
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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Negative VAR
Hi John,
What does negative VAR imply? Will this happen in the exam?
The VAR cannot be negative (either in the exam or in real life).
Hi John,
Sorry, I need to rephrase. VAR is positive but it is higher than the average.
It was in an example in the BPP textbook whereby NPV for 4 years is $2mil and standard deviation for 1 year is $1mil.
At 95% confidence level for the 4 years, it is 1.645 * $1mil * square root of 4 = $3.29m.
Using $2mil to deduct $3.29m, I get -$1.29m. Does this mean that I am 95% confident that the return will be a loss of $1.29m and there is less than 5% chance that the loss will be greater than $1.29m?
It seems that the BPP textbook is a bit confused if you have cop[ied from there correctly.
We use VaR on the annual net flow, not on the NPV.
So if there were a return of $2m per year for 4 years, then the total average return would be $8M.
There is a 5% chance therefore of the total return being less than 8 – 3.29 = $4.71M.
Have you watched my free lectures on VaR?