# How to set VaR and other Risk Limits

I have read a lot of literature on how to calculate VaR and it's advantages and disadvantages. But I am struggling to find anything on how to set a VaR limit.

For example, say if I am a Risk Manager and management expects the Portfolio to return \$10m over 1 year, how should I set VaR and Expected Shortfall limits for this? I understand this will differ amongst firms, but I have struggled to find any basic literature that can give me a base to build upon this. Second, say if I am a Trader for that Portfolio and I am expected to make$10m profit over the next year with X VaR and Y Expected Shortfall, how should I utilise my VaR and Expected Shortfall limits to achieve my target.

Many thanks

Offtensive

Edit:

If I am trying to consider the strategy below:

Yearly target: \$3m Trading days: 250 Daily Target: \$12k

Therefore I would want a strategy that gives me an average return of $12k per day. If my Sharpe Ratio is 1, therefore Sigma = 12k 99% is 2.32 sigma away from the mean So 12k - 2.32 * 12k = -16k So I would run \$16k VaR

That's wrong isn't it? That I can make $3m per annum with a \$16k daily VaR

• "I am struggling to find anything on how to set a VaR limit" - My experience is this is often imposed by your mandate. You are given a risk limit (in terms of VAR or drawdown) and that maps to your return rather than starting with your return and establishing the amount of risk required to generate that return. Commented Nov 20, 2021 at 17:27

A good paper on setting up a risk appetite framework is The Financial Stability Board (FSB) Principles for an Effective Risk Appetite Framework (November 18, 2013). The general principles in $$\S3$$, Risk limits, will help you (not only with market risk).
• Thanks, I have edited my original post to include an example. Say I have a portfolio where my cumulative return needs to be $3m, I have done that as my daily mean return will be$12k. I assume I have made a mistake somewhere, probably as I have assumed I can achieve a constant PnL everyday. This is along my lines of thinking, i.e. how would I work out a distribution of hypothetical PnLs and then set VaR from that. Commented Nov 14, 2021 at 15:20