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FRM Part I · FRM Exam Part I · Calculating and Applying VaR

A portfolio manager reports a one-day 99% VaR of USD 2.0 million. Which statement correctly interprets this figure?

A one-day 99% VaR of USD 2.0 million means that, under the model's assumptions, there is a 1% chance of losing more than USD 2.0 million in a day. It is a quantile threshold, not a worst-case loss or an average tail loss.

  1. AThere is a 1% probability that the portfolio loses more than USD 2.0 million over one day, under the model's assumptionsCorrect
  2. BThe portfolio will lose exactly USD 2.0 million on the worst 1% of days
  3. CThe maximum possible one-day loss is USD 2.0 million
  4. DThe expected loss on a day when the VaR is breached is USD 2.0 million

Explanation

VaR at 99% is the loss threshold that is exceeded with probability 1% over the horizon. It is not a maximum loss, and it says nothing about the size of losses beyond the threshold; that is expected shortfall's role.

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