Skip to content

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

A risk analyst estimates the 1-day 99% VaR of a portfolio using Monte Carlo simulation. She generates 10,000 simulated daily P&L outcomes and sorts them from worst to best. Which simulated outcome is the best estimate of the 99% VaR?

The 99% VaR is about the 100th worst of 10,000 simulated outcomes, because 1% of 10,000 is 100 trials in the tail. The 500th worst outcome would instead estimate the 95% VaR, which leaves 5% of trials in the tail.

  1. AThe 1st worst outcome
  2. BThe 100th worst outcome (approximately)Correct
  3. CThe 500th worst outcome
  4. DThe 9,900th worst outcome

Explanation

A 99% VaR leaves 1% of outcomes in the tail. With 10,000 trials, 1% equals 100 observations, so the VaR is read at about the 100th worst outcome. The 500th worst would correspond to a 95% VaR.

Did you get it right without looking?

One question tells you little. A timed set on Calculating and Applying VaR shows your real accuracy, how long you take and where you lose marks.

Practise Calculating and Applying VaRFree diagnostic mock

More Calculating and Applying VaR questions