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FRM Part I · FRM Exam Part I · Calculating and Applying VaR

A bank uses basic historical simulation with a 250-day window. The 95% 1-day VaR is taken as the 13th-worst loss, since 5% of 250 is 12.5 and the convention rounds up. Which statement about this estimate is most accurate?

The estimate is nonparametric and weights all 250 observations equally, so it adapts slowly to changes in volatility. It does not assume normality or rely only on a mean and standard deviation, and shortening the window to 50 days would make tail estimation less precise.

  1. AIt assumes returns are normally distributed with constant volatility
  2. BIt uses only the mean and standard deviation of the historical sample
  3. CIt is a nonparametric estimate that gives equal weight to all 250 observations and is slow to react to volatility changesCorrect
  4. DIt becomes more precise as the window is shortened to 50 days

Explanation

Basic historical simulation is nonparametric, makes no normality assumption, and weights all observations equally, so it reacts slowly to volatility shifts. Shortening the window reduces the number of tail observations and raises sampling error rather than improving precision.

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