FRM Part II · FRM Exam Part II · VaR and Risk Budgeting in Investment Management
A fund manager runs a USD 400 million equity portfolio against a benchmark. Annualised tracking error is 4%. Assuming normally distributed active returns with zero expected active return, what is the 95% one-year relative VaR (use z = 1.65)?
The 95% one-year relative VaR is USD 26.4 million. It equals 1.65 times the 4% tracking error times the USD 400 million portfolio value, which is 1.65 times USD 16 million, assuming normal active returns with zero mean.
- AUSD 6.6 million
- BUSD 26.4 millionCorrect
- CUSD 16.0 million
- DUSD 1.65 million
Explanation
Relative VaR = 1.65 × 4% × 400 million = 1.65 × 16 million = 26.4 million. USD 6.6 million is 1.65 × 4% without the portfolio size scaling error (1.65×4=6.6, a units mistake). USD 16.0 million omits the z-factor.
Did you get it right without looking?
One question tells you little. A timed set on VaR and Risk Budgeting in Investment Management shows your real accuracy, how long you take and where you lose marks.
More VaR and Risk Budgeting in Investment Management questions
- A plan sponsor has two managers with standalone active (tracking-error) risks of 4% and 3% of plan assets. The correlation between their act…
- Which of the following changes would, all else equal, most clearly reduce the information ratio implied by the Fundamental Law of Active Man…
- A portfolio has an expected return of 10%, the benchmark return is 7%, and the tracking error (standard deviation of active return) is 4%. T…
- A sponsor uses a total risk budget with these managers: A has an expected active return of 2% and tracking error of 4%; B has 3% and 4%. Act…
- A large asset owner lets each manager run its own portfolio and report VaR, then the central risk team aggregates the numbers. What is the m…
- A manager has a 100 million portfolio with expected excess return over the risk-free rate of 5 million annually and a 95% one-year VaR (norm…