Computing VAR - monthly, weekly, daily

CFA Level III Derivatives
#1

Schweser book 4 pg 56-57

why do we square root monthly, weekly and daily SD when computing VAR?

#2

I believe that you’re misreading the explanation.

If you’re given annual numbers – return, variance of returns, standard deviation of returns – and you want:

  • Monthly numbers, you divide the annual return by 12, you divide the annual variance by 12, but you divide the annual standard deviation by √12
  • Weekly numbers, you divide the annual return by 52, you divide the annual variance by 52, but you divide the annual standard deviation by √52
  • Daily numbers, you divide the annual return by 260 (or 365), you divide the annual variance by 260 (or 365), but you divide the annual standard deviation by √260 (or √365)

You divide the standard deviation by the square root of the number of sub-periods (months, weeks, days) in a year; you don’t take the square root of the standard deviation.

1 Like
#3

awesome. thanks,

#4

My pleasure.