Jul 22

Value at risk (VaR): Historical Simulation, Portfolio – 6 min screencast

by David Harper, CFA, FRM, CIPM

Today I extend yesterday's single-asset example to illustrate portfolio value at risk (VaR) under simple historical simulation. In this example, the portfolio consists of three assets: stock in Google, Yahoo, and Microsoft.

The process is:

I calculated for each stock the historical series of daily periodic returns (bottom left, below).
For each historical day (e.g., Friday 7/18), I calculate the portfolio gain/loss as if I held the current portfolio on that day. This is the essence of the historical simulation: we run the current portfolio allocation through historical returns.
This produces an historical series (right column, green) of simulated portfolio returns. Now I can treat as with the single-asset; e.g., if I want 95% VaR, then I need = PERCENTILE(range, 5%)