FRM Part II · FRM Exam Part II · Portfolio Risk: Analytical Methods
A risk manager notes that a portfolio's 95% VaR is USD 4 million. Which interpretation is correct?
A 95% VaR of USD 4 million means there is a 5% probability that losses over the horizon exceed USD 4 million. It is a threshold, not a worst-case loss, and gives no information on how large losses beyond it could be.
- AOver the horizon, losses are expected to exceed USD 4 million with 5% probabilityCorrect
- BThe maximum possible loss over the horizon is USD 4 million
- CIf the loss exceeds USD 4 million, the average loss will be exactly USD 4 million
- DLosses will be below USD 4 million with 5% probability
Explanation
VaR at 95% is the loss threshold exceeded with 5% probability over the horizon. It is not a maximum loss and says nothing about the size of losses beyond it, which is the role of expected shortfall.
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