FRM Part I · FRM Exam Part I · Measures of Financial Risk
A portfolio's one-day portfolio returns are normally distributed with mean zero and a standard deviation of 1.5%. The portfolio value is USD 40 million. Using z = 1.645, what is the one-day 95% VaR?
The one-day 95% VaR is USD 0.987 million. With zero mean, VaR equals the z-value of 1.645 times the daily volatility of 1.5% times the USD 40 million portfolio value, which is 1.645 times USD 0.6 million.
- AUSD 0.60 million
- BUSD 0.987 millionCorrect
- CUSD 1.396 million
- DUSD 1.410 million
Explanation
VaR = 1.645 × 1.5% × 40 million = 1.645 × 0.6 million = 0.987 million. The USD 0.60 million option is the one-standard-deviation loss with no multiplier. The 1.396 million option wrongly uses z = 2.326 (99%).
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