Skip to content

FRM Part II · FRM Exam Part II · Estimating Market Risk Measures: An Introduction and Overview

A portfolio manager models daily portfolio P/L as normally distributed with a mean of USD 20,000 and a standard deviation of USD 100,000. Using z = 1.645 for 95% confidence, what is the one-day 95% VaR measured relative to zero (i.e., as a loss figure that includes the mean)?

VaR relative to zero equals z times sigma minus the mean: 1.645 times 100,000 is 164,500, less the 20,000 expected profit, giving USD 144,500. A positive expected return reduces the loss threshold at the confidence level.

  1. AUSD 144,500Correct
  2. BUSD 164,500
  3. CUSD 184,500
  4. DUSD 20,000

Explanation

Normal VaR on P/L = -mu + z*sigma = -20,000 + 1.645*100,000 = 164,500 - 20,000 = 144,500. Option USD 164,500 ignores the positive mean (VaR relative to the mean). USD 184,500 adds the mean with the wrong sign.

Did you get it right without looking?

One question tells you little. A timed set on Estimating Market Risk Measures: An Introduction and Overview shows your real accuracy, how long you take and where you lose marks.

Practise Estimating Market Risk Measures: An Introduction and OverviewFree diagnostic mock

More Estimating Market Risk Measures: An Introduction and Overview questions