Skip to content

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

A risk committee is deciding whether to replace 99% VaR with 97.5% expected shortfall as its primary tail measure. Which statement best supports the use of expected shortfall?

Expected shortfall is preferred because it reflects the magnitude of losses beyond the VaR threshold and satisfies subadditivity, making it a coherent measure. It is never smaller than VaR at the same confidence level and is not identical to it, and it does not ignore tail losses.

  1. AIt ignores losses beyond the quantile, which makes it easier to backtest directly
  2. BIt equals VaR at the same confidence level for any distribution
  3. CIt accounts for the size of losses beyond the VaR threshold and is subadditiveCorrect
  4. DIt is always smaller than VaR at the same confidence level

Explanation

ES averages losses in the tail beyond the quantile, so it reflects tail severity, and it is subadditive and thus coherent. It is at least as large as VaR at the same confidence level, not smaller, and it does not ignore tail losses; the first option describes VaR's weakness, and ES is generally harder to backtest.

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