Explain degree of confidence and relationship with deviation

Question

Explain degree of confidence and the relationship along with deviation.

Answer 1

If you are working completely with normal distributions then going from one confidence level to another is just an issue of looking at a table of numbers for the standardized normal distribution as in table. As long as your time horizon is adequately short for the growth to be insignificant you can use the square-root rule to go from one time horizon to the other. The value at risk will scale with the square root of the time horizon; it assumes that the portfolio return is normally distributed too.

Table: Degree of confidence and the relationship along with deviation from the mean.

Degree of confidence                 Number of standard deviations from the mean

          99%                                                     2.326342
          98%                                                     2.053748
          97%                                                     1.88079
          96%                                                     1.750686
          95%                                                     1.644853
          90%                                                      1.281551