FRM Part II · FRM Exam Part II · Portfolio Risk: Analytical Methods
A portfolio worth USD 50 million has an annual expected return of 8% and annual volatility of 12%. Assuming normal returns, what is the one-year 95% VaR measured relative to the mean (use z = 1.645)?
Relative VaR is USD 9.87 million: 1.645 times 12% volatility times USD 50 million. This measures loss from the expected value. Subtracting the USD 4 million expected gain would give the absolute-VaR figure of 5.87 million instead.
- AUSD 9.87 millionCorrect
- BUSD 5.87 million
- CUSD 13.87 million
- DUSD 6.00 million
Explanation
Relative VaR = z x sigma x V = 1.645 x 0.12 x 50 = 9.87 million. Absolute VaR would subtract the mean of 4.0 million, giving 5.87 million. Adding the mean gives 13.87 million, which is wrong in sign.
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