Summary
In this chapter, an important risk measure called the Value at Risk (VaR) was discussed in detail. To estimate the VaR for individual stocks or portfolios, the two most popular methods are explained: based on the normality assumption and based on the sorting of historical returns. In addition, we have discussed the modified VaR method which considers the third and fourth moments in addition to the first two moments of returns. In Chapter 12, Monte Carlo Simulation, we explain how to apply simulation to finance, such as simulating stock price movements and returns, replicating the Black-Scholes-Merton options model, and pricing some exotic options.
