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

A risk manager is evaluating whether to replace 99% VaR with a spectral risk measure. Which property distinguishes a spectral risk measure from VaR in terms of how it treats the loss distribution?

A spectral risk measure is a weighted average of the loss quantiles, with weights set by a risk-aversion function. VaR looks at one quantile only. Because the weights reflect the user's attitude to risk, the measure can capture how severely larger losses are viewed.

  1. AIt assigns a weight to each quantile of the loss distribution, with weights that reflect the user's risk aversionCorrect
  2. BIt considers only the single loss at the chosen confidence level and ignores all other quantiles
  3. CIt assigns equal weight to every quantile of the loss distribution
  4. DIt assigns weights to quantiles that decrease as losses become larger

Explanation

A spectral risk measure is a weighted average of quantiles, where the weights come from a risk-aversion function. VaR uses only one quantile. Equal weights across all quantiles would give the expected loss, which is risk-neutral, and weights falling with loss size would contradict risk aversion.

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