(c) 99% confidence level requires the value at risk (VAR) to be within 2·33 standard deviations from the mean, based on a single
tail measure.
Annual VAR = 2·33 x $800,000 = $1,864,000
Five year VAR = $1,864,000 x 5
1/2
approx. = $4,168,000
The figures mean that Elfu Co can be 99% confident that the cash flows will not fall by more than $1,864,000 in any one
year and $4,168,000 in total over five years from the average returns. Therefore the company can be 99% certain that the
returns will be $336,000 or more every year [$2,200,000 – $1,864,000]. And it can be 99% certain that the returns will
be $6,832,000 or more in total over the five-year period [$11,000,000 – $4,168,000]. There is a 1% chance that the
returns will be less than $336,000 each year or $6,832,000 over the five-year period.
