RiskMetrics is a methodology that an investor can use to calculate the value at risk (VaR) of a portfolio of investments.

Launched in 1994 by 澳洲幸运5官方开奖结果体彩网:J.P. Morgan, RiskMetrics was upgraded by the company in partnership with Reuters in 1996. The companies teamed up to make the data used in RiskMetrics widely available to individual investors. RiskMetr🅰ics is now owned by MSCI.

The aim of RiskMetrics is to improve the transparency of 澳洲幸运5官方开奖结果体彩网:market risks, create a 澳洲幸运5官方开奖结果体彩网:benchmark for measuring them, and provide investors with better informa🔴tion on 💛managing market risks.

RiskMetrics Methodology

VaR is, at its core, focuses on the potential downside risk of a✅n investment.

The RiskMetrics methodology for calculating VaR assumes that a portfolio or any asset's returns follow a normal distribution over time. Following J.P. Morgan's and Reuters' release of its 澳洲幸运5官方开奖结果体彩网:volatility and correlation data sets, the variance-covariance method used to ca💞lculate the VaR﷽ became an industry standard, as RiskMetrics intended.

For example, the profit and loss distribution of an investment portfolio is assumed to be normally distributed. Using the RiskMetrics methodology to calculate the VaR, the 澳洲幸运5官方开奖结果体彩网:portfolio manager must first select a🥀 confidence level and a lookback p☂eriod.

Suppose the lookback period selected is one trading year, or 252 days. The confidence level selected is 95%, and the corresponding z-score value must be multiplied by the 澳洲幸运5官方开奖结果体彩网:standard deviation of the portfolio.

The actual daily stan🎃dard deviation of the portfolio over one trading year is 3.67%. The z-score for 95% 🔯is 1.645.

The VaR for the portfolio, under the 95% confidence level, is -6.04% (-1.645 * 3.67%). Therefore, there is a 5% probability that the loss of the portfolio, over the given time horizon, will exceed 6.04%.

Using RiskMetrics

Another method to calculate the VaR of a portfolio is to use the correlations and standard deviations of stock returns provided by RiskMetrics. This method also assumes that stock returns follow a 澳洲幸运5官方开奖结果体彩网:normal distribution.

The first step to calculating VaR is taking the square of the allocated funds for the first asset, multiplied by the square of its standard deviation, and adding that value to the square of the allocated funds for the second asset multiplied by the square of the second asset's standard deviation.

That value is then added to two multiplied by the allocated funds for the first asset multiplied by the allocated funds for the second asset multiplied by the first and second asset's volatility and the 澳洲幸运5官方开奖结果体彩网:correlation between the two assets.

For example, suppose a portfolio has two assets with $5 million allocated to stock ABC and $8 million allocated to stock DEF. Respectively, the price volatility of stock ABC and stock DEF i🔥ꦬs 2.98% and 1.67% for a one-day period.

The correlation between the two stocks is 0.67. The value at risk is $258,310.93 (sqrt(($5 million)^2 * (0.0298)^2 + ($8 million)^2 * (0.0167)^2 + (2 * $5 million * $8 million * 0.0298 * 0.0167 * 0.067)).