IAI Actuarial Core Principles · Economic Modelling · Measures of investment risk
The 1-day 99% VaR of a portfolio is ₹5 crore. Assuming normally distributed, independent daily losses with zero mean, which is the 10-day 99% VaR using the square root of time rule?
Under independent, zero-mean normal daily losses, VaR scales with the square root of time. The 10-day VaR is 5 × √10, about ₹15.81 crore. Multiplying by 10 would wrongly assume perfect correlation between daily losses.
- A50.00 crore
- B15.81 croreCorrect
- C5.00 crore
- D25.00 crore
- 7.91 crore
Explanation
With independent zero-mean normal losses, the standard deviation scales with √10, so VaR scales the same way: 5 × 3.1623 = 15.81 crore. Multiplying by 10 ignores diversification across days.
Did you get it right without looking?
One question tells you little. A timed set on Measures of investment risk shows your real accuracy, how long you take and where you lose marks.
More Measures of investment risk questions
- Which is a recognised limitation of using standard deviation as the sole measure of investment risk?
- A pension fund's trustees care only about returns falling below a required 6% a year and are indifferent to upside variability. Which featur…
- An investor wants a risk measure that captures only the possibility of returns falling below a minimum acceptable level, and ignores variabi…
- Two portfolios have the same mean return of 10% and are normally distributed. Portfolio P has standard deviation 10% and Portfolio Q has sta…
- Over 5 years a portfolio's annual active returns relative to its benchmark were: +2%, -1%, +3%, 0% and +1%. Using the sample standard deviat…
- An investor has a utility of wealth function U(w) = ln(w). Which statement about this investor's attitude to risk is correct?