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A bank has estimated that the expected value of its portfolio in two weeks’ time will be $50 million, with a standard deviation of $4.85 million.
Required:
Using a 95% confidence level, identify the value at risk.
A 95% confidence level will identify the reduced value of the portfolio that has a 5% chance of occurring.
From the normal distribution tables, 1.65 is the normal distribution value for a one-tailed 5% probability level. Since the value is below the mean, –1.65 will be needed.
Hello
I could not understand that how come 1.65 come from normal distribution value table?
Could you please help me?Since the distribution is symmetrical, 50% are above the average and therefore for 95% confidence we need 45% (95 – 50) below the average.
So you look up how many std deviations give an answer of 0.45 (45%). The nearest is 1.65.
It will help you to watch the free lecture on value at risk.
It is linked from this page: https://opentuition.com/acca/p4/acca-p4-lectures/
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