FRM Part II · FRM Exam Part II · VaR and Risk Budgeting in Investment Management
A portfolio manager runs a 400 million equity portfolio against a benchmark. The annualized tracking error is 4%. Assuming normally distributed active returns with zero mean, what is the annual relative VaR at 95% confidence (z = 1.645)?
Relative VaR is 26.32 million. Multiply the tracking error of 4% by 400 million to get 16 million of active risk, then scale by 1.645 for 95% confidence under normality with zero mean active return.
- A6.58 million
- B16.00 million
- C26.32 millionCorrect
- D65.80 million
Explanation
Relative VaR = 1.645 × 4% × 400 million = 1.645 × 16 million = 26.32 million. The 6.58 million figure applies 1.645 to 4% without scaling by the portfolio size, then divides by 1, mis-scaling the base, and 16 million omits the z-multiplier.
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