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FRM Part II · FRM Exam Part II · Global Financial Stability Report, April 2025, Chapter 2 (Geopolitical Risk)

A portfolio manager has USD 200 million invested and estimates a one-day 99% VaR of USD 4.0 million under normal conditions. A geopolitical stress scenario is expected to double return volatility, with the normal distribution assumption and zero mean unchanged. What is the stressed one-day 99% VaR as a percentage of portfolio value?

The stressed VaR is 4.0% of portfolio value, or USD 8 million. Under a normal distribution with zero mean, VaR scales linearly with volatility, so doubling volatility doubles the baseline 2.0% VaR (USD 4 million on USD 200 million).

  1. A2.0%
  2. B4.0%Correct
  3. C8.0%
  4. D16.0%

Explanation

Normal VaR is proportional to volatility. Baseline VaR is 4.0/200 = 2.0% of value. Doubling volatility doubles VaR to 4.0% (USD 8.0 million). Choosing 2.0% ignores the shock; 8.0% double-counts by doubling the percentage again; 16.0% wrongly squares the volatility effect.

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