How to interpret/use VaR and Standard Deviation?

The parametric VaR is defined as follows:

$$VaR=Z_a*Vol$$

• Is this the best way to interpret how much risk is being taken on for a particular asset?
• How does one interpret volatility on its own if its not converted into a percent figure?
• Therefore, wouldn't be better if sharp ratios were expressed in VaR's?
• I mean, what does it really mean if a Portfolio Manager is gaining 2% return for 1 unit of risk. What does 1 unit of risk mean?
• Shouldn't risk only be defined only in percentage terms -- having a hard time wrapping my head around this concept of volatility as a risk measure.

• What do you guys think?

-
My god... Just spend a bit of time to format your questions. It looks so much more understandable after what I just did. –  SRKX Dec 26 '12 at 0:03

VaR is not a good measure of risk taking, in my opinion. It suffers from inherent faulty assumptions (check out VaR Wiki to start) and it omits many other important aspects of risk measurement.

When I evaluate an asset's risk and return I like to start looking at the following:

• Historical risk and returns of an asset. This leads to the Sharpe Ratio, though I prefer a slightly different ratio which does not penalize for excess performance to the upside (Sharpe Ratio does penalize)
• Expected returns and risk. Can I have confidence that historical risk and return figures are a reasonable predictor of future risk and return. If not then, is there a way to make adjustements? If not then I should not take into consideration historical risk and return values when evaluating future expected risk and returns.
• Drawdowns of an asset's return. Alongside the drawdown I want to know how long it took for the asset's subsequent returns to make it back to the pre-drawdown return.
• Correlation of the asset with other assets. Is the asset uncorrelated or potentially even negatively correlated with other assets?
• Contribution of the asset to the portfolio overall. Does the asset contribute to a lower portfolio risk and portfolio risk adjusted returns.