FRM Part II · FRM Exam Part II · Portfolio Risk: Analytical Methods
A portfolio manager has a portfolio worth USD 80 million. Daily returns are assumed normally distributed with zero mean and a daily standard deviation of 1.5%. Using z = 2.33 for 99% confidence, what is the one-day 99% parametric VaR?
The one-day 99% VaR is about USD 2.80 million. It equals 2.33 times the 1.5% daily volatility times the USD 80 million portfolio value, assuming normal returns with zero mean, so the loss is exceeded only about 1% of days.
- AUSD 1.20 million
- BUSD 2.80 millionCorrect
- CUSD 3.96 million
- DUSD 4.66 million
Explanation
VaR = 2.33 x 1.5% x 80m = 0.03495 x 80m = USD 2.796m, about USD 2.80m. Using z = 1.65 (95%) would give USD 1.98m, and using 1 sigma only gives USD 1.2m; USD 4.66m wrongly uses a 3.88% z-sum.
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