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CMA Final · Strategic Performance Management and Business Valuation · Risk Management

Which statement about value at risk (VaR) as a risk measure is correct?

VaR states the loss level that should not be exceeded over a specified period at a given confidence level, such as 95% over one day. It is not the absolute worst loss, and the average tail loss is a different measure called expected shortfall.

  1. AIt states the loss that is not expected to be exceeded over a given period at a stated confidence levelCorrect
  2. BIt states the maximum possible loss that can ever occur on a portfolio
  3. CIt measures only the average of losses beyond the confidence threshold
  4. DIt is the same as the standard deviation of returns expressed in rupees

Explanation

VaR gives a loss threshold for a chosen horizon and confidence, for example 95% over one day. It is not the worst possible loss, and the average of losses beyond the threshold is expected shortfall. Standard deviation is an input to parametric VaR, not equal to it.

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