Skip to content

FRM Part II · FRM Exam Part II · Estimating Market Risk Measures: An Introduction and Overview

A risk analyst scales a one-day 99% normal VaR of USD 3 million to a 10-day horizon, assuming iid zero-mean normal returns. Which result is correct, and why?

The 10-day VaR is about USD 9.49 million. For iid zero-mean normal returns, the standard deviation grows with the square root of time, so the one-day VaR of 3 million is multiplied by the square root of 10.

  1. AUSD 30.0 million, because VaR scales linearly with days
  2. BUSD 9.49 million, because VaR scales with the square root of timeCorrect
  3. CUSD 6.00 million, because VaR scales with the square root of the confidence level
  4. DUSD 3.00 million, because zero-mean returns do not accumulate

Explanation

With iid normal zero-mean returns, volatility scales with the square root of time, so VaR = 3 x sqrt(10) = 9.49 million. Linear scaling ignores diversification across days. The other options have no basis in the model.

Did you get it right without looking?

One question tells you little. A timed set on Estimating Market Risk Measures: An Introduction and Overview shows your real accuracy, how long you take and where you lose marks.

Practise Estimating Market Risk Measures: An Introduction and OverviewFree diagnostic mock

More Estimating Market Risk Measures: An Introduction and Overview questions