FRM Part I · FRM Exam Part I · Calculating and Applying VaR
A portfolio manager has a one-day 95% VaR of USD 2.0 million, using z = 1.645, under zero-mean normal returns. Using the square-root-of-time rule, what is the approximate 10-day 99% VaR (z = 2.33)?
The 10-day 99% VaR is about USD 8.96 million. First convert the one-day 95% VaR to 99% by multiplying by 2.33/1.645, giving about USD 2.83 million, then scale by the square root of 10 for the horizon.
- AUSD 8.96 millionCorrect
- BUSD 6.32 million
- CUSD 2.83 million
- DUSD 20.0 million
Explanation
Scale the confidence level: 2.0 × 2.33/1.645 = 2.8328 million for one-day 99%. Multiply by sqrt(10) = 3.1623 to get about USD 8.96 million. Omitting the confidence adjustment gives 6.32 million.
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