FRM Part I · FRM Exam Part I · Measures of Financial Risk
A portfolio's daily profit and loss is normally distributed with a mean of zero and a standard deviation of USD 2.0 million. Using a z-value of 2.33 for the 99% confidence level, what is the one-day 99% VaR?
The one-day 99% VaR is USD 4.66 million. With a zero mean and normally distributed P&L, VaR equals the 99% z-value of 2.33 multiplied by the USD 2.0 million standard deviation, giving the loss threshold exceeded only 1% of the time.
- AUSD 4.66 millionCorrect
- BUSD 3.29 million
- CUSD 2.33 million
- DUSD 1.65 million
Explanation
With zero mean, VaR = z x sigma = 2.33 x 2.0 = USD 4.66 million. USD 3.29 million uses the 95% z-value of 1.645, which is the wrong confidence level. USD 2.33 million forgets to multiply by sigma.
Did you get it right without looking?
One question tells you little. A timed set on Measures of Financial Risk shows your real accuracy, how long you take and where you lose marks.
More Measures of Financial Risk questions
- A risk manager estimates a portfolio's one-day 97.5% Expected Shortfall (ES). Which statement correctly describes what this figure measures?
- For a sample of n = 400 independent returns, an analyst estimates the 5% quantile. The estimated density at the quantile is f(q) = 4.0 (per …
- A risk committee wants a risk measure that is coherent and gives more weight to larger losses by weighting quantiles. Which approach matches…
- Which property distinguishes ES from VaR when assessing whether a risk measure is coherent?
- A risk manager reviews four properties that a risk measure may satisfy: monotonicity, translation invariance, homogeneity, and subadditivity…
- A risk manager reports that a portfolio's one-day 99% VaR is USD 5 million. Which interpretation is correct?