Introduction to VaR & Beta

Risk is not just a feeling. It is a number. Two of the most important numbers in finance are VaR and Beta.

1. Beta (β) - Relative Volatility

Beta measures how much a stock moves compared to the Market (Nifty/Sensex).

• Beta = 1: Stock moves exactly like the market.
• Beta > 1 (High Beta): Aggressive. If Market goes up 1%, Stock goes up 1.5%. (e.g., Adani Ent).
• Beta < 1 (Low Beta): Defensive. If Market goes down 1%, Stock goes down only 0.5%. (e.g., HUL, ITC).
• Beta = 0: Uncorrelated (e.g., Gold).
• Beta < 0: Inverse (Moves opposite to market).

Formula: Covariance(Stock, Market) / Variance(Market)

Use Case:

• Bull Market? Buy High Beta stocks.
• Bear Market? Buy Low Beta stocks.

2. VaR (Value at Risk) - The "Worst Case" Scenario

VaR answers the question: "What is the maximum I can lose?" (with a certain confidence).

Statement: "Daily VaR is ₹1 Lakh at 95% confidence." Meaning:

• On 95 out of 100 days, my loss will NOT exceed ₹1 Lakh.
• On the remaining 5 days (Tail Risk), it could be anything (even ₹10 Lakhs).

Calculation Methods:

1. Historical: Look at past 500 days. Rank the returns. The 5th percentile is your VaR.
2. Parametric: Assume Normal Distribution (Bell Curve). VaR = Mean - (Z-score * Standard Deviation).
3. Monte Carlo: Simulate 10,000 future scenarios.

3. Standard Deviation (Volatility)

The most common measure of risk.

• High SD = High swings (Crypto).
• Low SD = Stable (FD).

7-Day Action Plan

Day 1: Go to a finance website (Moneycontrol/Screener). Check the Beta of HDFC Bank vs Adani Enterprises.
Day 2: Calculate the Beta of your own portfolio (Weighted Average).
Day 3: Understand why "High Beta" is dangerous in a crash.
Day 4: Read about "Black Swan Events" (The 1% that VaR ignores).
Day 5: If you trade F&O, check the "Span Margin". It is based on VaR.
Day 6: Learn the difference between "Systematic Risk" (Market risk, can't diversify) and "Unsystematic Risk" (Company risk, can diversify). Beta measures Systematic Risk.
Day 7: Calculate the Standard Deviation of your monthly expenses. (Are they volatile?).

Quiz

💡 Final Wisdom: Beta tells you how wild the ride will be. VaR tells you if you can survive the crash. Know both.