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FRM Part II · FRM Exam Part II · Estimating Market Risk Measures: An Introduction and Overview

Which statement best describes an advantage of lognormal VaR over normal VaR for an unleveraged long position in a stock?

Lognormal VaR keeps the modelled asset price positive, so the loss on an unleveraged long position is capped at its initial value. Normal VaR lacks this bound and can imply losses beyond the position value.

  1. AIt guarantees VaR is lower than the normal VaR at every confidence level
  2. BIt ensures the asset price cannot fall below zero, so the loss cannot exceed the position valueCorrect
  3. CIt makes VaR subadditive across portfolios
  4. DIt removes the need to estimate volatility

Explanation

Lognormal prices are always positive, so the modelled loss on a long position cannot exceed its initial value. Normal VaR can in theory exceed the position value. Lognormal VaR is not always lower, does not guarantee subadditivity, and still requires volatility.

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