Implementing the Variance-Covariance Method for Assessing Market Transaction Risks in Raw Material Sector Stocks

Abstract

The capital market plays a crucial role in supporting a country's economic growth. Besides being a funding source, the capital market also serves as an investment avenue for investors, particularly through stocks. Every investor must be willing to bear risks in line with their targeted returns. Risk is defined as the uncertainty of future outcomes due to market condition changes, and VaR (Value at Risk) is used to determine the tolerated loss at a certain confidence level. This study discusses the application of the Value at Risk (VaR) method using the Variance-Covariance approach to mitigate market risks in the portfolio of raw material sector stocks. The study focuses on two raw material sector stocks in Indonesia, assuming a normal distribution of asset price changes. The measurement results indicate that with an investment of Rp. 100,000,000.00, a 95% confidence level, and a 1-day period, the VaR of the portfolio of these five stocks is Rp. 2,769,750.00. This research provides critical insights to assist investors in understanding and managing portfolio risks, making VaR a key indicator to measure potential future risks and laying the foundation for decision-making in risk management.