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FRM Part II · FRM Exam Part II · Portfolio Risk: Analytical Methods

At the optimal risk-return allocation across several positions, which condition on marginal VaR should hold?

At the optimum, the ratio of expected excess return to marginal VaR is the same for every position. If one position offered a higher return per unit of marginal risk, shifting capital toward it would improve the portfolio's risk-return trade-off.

  1. AThe ratio of expected excess return to marginal VaR is equal across all positionsCorrect
  2. BMarginal VaR is equal across all positions
  3. CComponent VaR is equal across all positions
  4. DIncremental VaR is zero for every position

Explanation

Optimality requires that each position yields the same excess return per unit of marginal risk, so no reallocation improves the trade-off. Equal marginal VaRs alone ignore differences in expected return, and equal component VaRs have no optimality meaning.

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