FRM Part I · FRM Exam Part I · Calculating and Applying VaR
Which change, holding all else equal, will reduce a reported VaR figure for a portfolio with positive volatility?
Reducing the confidence level from 99% to 95% lowers VaR, because the loss quantile moves closer to the center of the distribution. Longer holding periods, higher confidence levels and higher volatility all increase VaR.
- ALengthening the holding period from 1 day to 5 days
- BRaising the confidence level from 95% to 99%
- CReducing the confidence level from 99% to 95%Correct
- DIncreasing the estimated volatility of the portfolio's returns
Explanation
VaR rises with the holding period, the confidence level and volatility. Lowering confidence from 99% to 95% reduces the quantile (z from about 2.33 to 1.645) and so reduces VaR. The other three changes each increase VaR.
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