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The Model Building Approach To Value At Risk Finance Essay

The Model Building Approach To Value At Risk Finance EssayThe investment of any nature financial or physical assets comes with reward and risk. In order to prosper a company or an individual has to take risk. Generally, investors are risk averse. The risk can be estimated and managed in certain way such that the expected future earnings can be obtained while reducing potential future distress. The key to any investments is pursuing calculated risk path and achieving balance between risk and expected return.The question presented in this assignment also highlights one of the important tools in the risk assessment called Value at Risk. Value at Risk (VaR) is simple but more powerful tool to understand the impact of risk on the portfolio over the period of time. The second part of the assignment explains the stress and back testing covering up some of VaRs shortcomings.(1) Question:Explain and critically evaluate the model building approach to Value at Risk (VaR). To what extent may the weaknesses of this approach be addressed by stress testing and back testing?

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