Overview

The Monte Carlo method of calculating Value at Risk, uses a specified distribution for the portfolio returns, then simulates several runs of the portfolio evolution. The method then looks at portfolio loss that occured at the {% \alpha %} percentage. That is, if {% \alpha %} is defined to by the {% 99 \% %}, then the analyst can simulate 1000 runs, sort by the amount of loss, and take the {% 10^{th} %} loss in the series.

Portfolio Distribution

• Portfolio Returns as Time Seires - in this method, the portfolio distribution is assigned withough simulating the underlying assets.
• Aggregated from Individual Holding Distributions - this method starts by assigning a distribution to each asset in the portfolio. Then, it also must assign a correlation, or a copula that can determine how the asset returns comove. Once these have been determined, the portfolio can be simulated by simulating the underlying assets.