A Practitioner's Guide to Asset Allocation by William Kinlaw Mark P. Kritzman David Turkington & MARK P. KRITZMAN & DAVID TURKINGTON

Author:William Kinlaw,Mark P. Kritzman,David Turkington & MARK P. KRITZMAN & DAVID TURKINGTON
Language: eng
Format: epub
ISBN: 9781119402459
Publisher: John Wiley & Sons, Inc.
Published: 2017-05-22T00:00:00+00:00

Within‐Horizon Value at Risk

We use the same first passage time equation to estimate within‐horizon value at risk. Whereas value at risk measured conventionally gives the worst outcome at a chosen probability at the end of an investment horizon, within‐horizon value at risk gives the worst outcome at a chosen probability from inception to any time throughout an investment horizon. It is not possible to solve for within‐horizon value at risk analytically. We must resort to a numerical method. We set Equation (12.3) equal to the chosen confidence level and solve iteratively for . Within‐horizon value at risk equals multiplied by initial wealth.

These two measures of within‐horizon exposure to loss bring us closer to the real world because they recognize that investors care about drawdowns that might occur throughout the investment horizon. But they ignore another real‐world complexity, to which we now turn.

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