FRM Part I · FRM Exam Part I · Calculating and Applying VaR
A firm has a 99% one-day VaR of 2 million. Assuming normally distributed returns and independent days, what is the approximate 99% ten-day VaR using the square-root-of-time rule?
The ten-day 99% VaR is about 6.32 million, obtained by scaling the one-day VaR of 2 million by the square root of 10. This relies on independent, identically distributed normal returns, and multiplying by 10 would overstate risk.
- A6.32 millionCorrect
- B20.0 million
- C2.0 million
- D4.47 million
Explanation
Ten-day VaR = 2 x sqrt(10) = 2 x 3.1623 = 6.32 million. Multiplying by 10 ignores that volatility scales with the square root of time. Using sqrt(5) gives 4.47, which uses the wrong number of days.
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