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#1

I've noticed that when calculating VaR/variance/std. dev of 2+ assets (or portfolio), sometimes the correlation/covariance is included, and sometimes it's not.

I.e. for standard deviation of 2 assets:

sqrt[w(1)^2*variance(1) + w(2)^2*variance(2)+2*w(1)*w(2)+covariance(1,2)] where (1) = asset 1 and (2) = asset 2; covariance(1,2)=correlation(1,2)*std dev(1)*std dev(2)

However, for VaR of 2 assets, it seems like the formula is usually:

sqrt[VaR(1)^2 + VaR(2)^2+2*VaR(1)*VaR(2)*correlation(1,2)]

Do we not include the weights in the VaR calculation because they're already considered since we scale by $? Also, why do we not multiplycorrelation by the product of both standard deviations, or simply just by covariance?

Sorry for the elementary question, just want to ensure that my basics are solid for the exam this weekend.

Thanks!

I.e. for standard deviation of 2 assets:

sqrt[w(1)^2*variance(1) + w(2)^2*variance(2)+2*w(1)*w(2)+covariance(1,2)] where (1) = asset 1 and (2) = asset 2; covariance(1,2)=correlation(1,2)*std dev(1)*std dev(2)

However, for VaR of 2 assets, it seems like the formula is usually:

sqrt[VaR(1)^2 + VaR(2)^2+2*VaR(1)*VaR(2)*correlation(1,2)]

Do we not include the weights in the VaR calculation because they're already considered since we scale by $? Also, why do we not multiplycorrelation by the product of both standard deviations, or simply just by covariance?

Sorry for the elementary question, just want to ensure that my basics are solid for the exam this weekend.

Thanks!

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