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FRM Part II · FRM Exam Part II · Portfolio Risk: Analytical Methods

A portfolio manager finds that a position has a negative marginal VaR. What does this imply?

A negative marginal VaR means adding a little more of the position lowers total portfolio VaR, so the position acts as a hedge against the rest of the portfolio. It reflects covariance with the portfolio, not expected return, and does not make stand-alone VaR negative.

  1. AAdding a small amount of the position would reduce portfolio VaR, so it acts as a hedgeCorrect
  2. BThe position has negative expected return
  3. CThe position's stand-alone VaR is negative
  4. DThe position must be sold because it destroys value

Explanation

Marginal VaR measures the change in portfolio VaR per unit increase in the position. A negative value means the position is negatively correlated enough with the portfolio to reduce risk at the margin. It says nothing about expected return, and stand-alone VaR remains positive.

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