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FRM Part I · FRM Exam Part I · Measures of Financial Risk

A risk manager estimates a portfolio's one-day 97.5% Expected Shortfall (ES). Which statement correctly describes what this figure measures?

Expected Shortfall at 97.5% is the average loss in the worst 2.5% of outcomes, that is, the expected loss given that loss reaches or exceeds the 97.5% VaR. It describes tail severity, whereas VaR only gives the threshold.

  1. AThe loss level that is exceeded with probability 2.5%
  2. BThe average loss conditional on the loss being at or beyond the 97.5% VaR levelCorrect
  3. CThe maximum loss that can occur over one day
  4. DThe average loss across all days in the sample

Explanation

ES is the conditional expectation of loss given that loss is at or beyond the VaR threshold at the chosen confidence level. The first option describes VaR itself, not ES. ES is not a maximum loss and is not an unconditional average.

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