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IAI Actuarial Core Principles · Economic Modelling · Measures of investment risk

A risk manager reports the 99% Value at Risk of a portfolio's one-day loss as ₹4 crore. Which statement correctly interprets this figure?

The 99% VaR of ₹4 crore means losses should exceed that amount on only about 1% of days. It is a percentile of the loss distribution, not the worst possible loss and not the average tail loss, which is what Tail VaR measures.

  1. AThe loss on the day will be exactly ₹4 crore with 99% probability
  2. BThe loss is expected to exceed ₹4 crore on about 1% of daysCorrect
  3. CThe average loss on the worst 1% of days is ₹4 crore
  4. DThe maximum possible loss over one day is ₹4 crore
  5. The loss will exceed ₹4 crore on about 99% of days

Explanation

VaR at 99% is the 99th percentile of the loss distribution. Losses exceed it with probability about 1%, so on about 1 day in 100. The average loss beyond VaR is the Tail VaR, not VaR, and VaR is not a maximum loss.

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