Models
Anybody who owns a portfolio of investments knows there is a great deal of uncertainty about the future worth of the portfolio. Recently the concept of value at risk (VAR) has been used to help describe a portfolio's uncertainty. Simply stated, value at risk of a portfolio at a future point in time is usually considered to be the fifth percentile of the loss in the portfolio's value at that point in time. The following example shows how @RISK can be used to measure VAR. The example also demonstrates how buying puts can greatly reduce the risk in a stock.
This example was taken from Chapter 62 of Financial Models using Simulation and Optimization by Wayne Winston, published by Palisade Corporation, where a detailed, step-by-step explanation can be found.
