CFA Level I · CFA Level I Exam · Introduction to Risk Management
A portfolio has a one-day 5% value at risk (VaR) of EUR 2.0 million. The most appropriate interpretation is that, over one day:
A 5% one-day VaR of EUR 2.0 million means the portfolio is expected to lose at least EUR 2.0 million on about 5% of days. VaR gives a minimum loss at a probability level, not a worst-case maximum loss.
- Athe portfolio is expected to lose exactly EUR 2.0 million
- Bthe portfolio will lose at most EUR 2.0 million in the worst case
- Cthe portfolio is expected to lose at least EUR 2.0 million on about 5% of daysCorrect
Explanation
VaR is the minimum loss expected with a given probability over a period. A 5% one-day VaR of EUR 2.0 million means losses of at least that amount are expected on about 5% of days. It is not a maximum loss, so the second option is wrong.
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