Value at Risk (VaR) Measurement on a Diversified Portfolio: Decomposition of Idiosyncratic Risk in a Pharmaceutical Industry

Abstract

Risk measurement is one of the most prominent tools of financial institutions and managers. Many investors try to know potential maximum loss of their financial assets as well as possible. There are many internal and publicly known risk measurement methods in the financial world.  In this study, maximum daily loss of diversified portfolio is calculated by using variance-covariance approach of the Value at Risk (VaR) Models.  Correlation and covariance matrices are used to estimate daily loss. VaR values are estimated both with and without portfolio effect.  Moreover, total risk of portfolio and individual shares are estimated by separating as idiosyncratic and systematic portions. 252 days of data belonging a year of 2015 are analyzed.

Keywords: Risk Measurement, VaR, Variance-Covariance approach, Systematic Risk, Idiosyncratic Risk