CFA Level I · CFA Level I Exam · Introduction to Risk Management
A portfolio has an annual expected return of 9% and an annual standard deviation of 12%. Assuming returns are normally distributed, the annual 5% VaR, using 1.65 standard deviations, expressed as a return is closest to a loss of:
The 5% VaR as a return is the mean minus 1.65 standard deviations: 9% − 19.8% = −10.8%, so the loss is about 10.8%. The 19.8% option ignores the positive expected return, and 9.0% is simply the mean.
- A9.0%
- B10.8%Correct
- C19.8%
Explanation
The 5% cutoff return is 9% − 1.65 × 12% = 9% − 19.8% = −10.8%, so the VaR is a loss of 10.8%. Using 19.8% ignores the expected return, which offsets part of the loss. A 9.0% figure is just the mean return.
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