CFA Level I · CFA Level I Exam · Introduction to Risk Management
A portfolio manager reports a one-day 5% VaR of EUR 2.0 million. This statement is best interpreted as meaning that:
A one-day 5% VaR of EUR 2.0 million means losses of at least EUR 2.0 million are expected on about 5% of days. VaR is a minimum loss at a given probability, not a maximum possible loss or an exact worst-day figure.
- Athe portfolio is expected to lose exactly EUR 2.0 million on the worst day
- Bon 5% of days, losses are expected to be at least EUR 2.0 millionCorrect
- Cthe maximum possible one-day loss over a year is EUR 2.0 million
Explanation
VaR is the minimum loss expected with the stated probability over the period. A 5% one-day VaR of EUR 2.0 million means losses of at least that size are expected on about 5% of days. It is not a maximum loss and does not describe the average tail loss.
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