CFA Practice Question
With 95% confidence, we expect that our worst daily loss will not exceed 5%. How can we explain such a VaR statement?
A. If we invest $100, we are 95% confident that our worst daily loss will not exceed $5 ($100 x -4%).
B. It is a false VaR statement because it misses a time horizon.
C. It is a false VaR statement. It mixes the frequency with the minimum magnitude.
Explanation: A VaR has three elements: minimum loss (5%), time horizon (daily), and frequency of losses (5%).
User Contributed Comments 5
| User | Comment |
|---|---|
| BB465 | How is "our worst daily loss" not a time horizon? |
| mikhail188 | My problem with this question is that "not exceed"should be "at least" |
| epfrndz | Same here, VaR does indicate maximum loss. It indicates minimum loss. |
| mtsimone | I thinkn the answer isn't correct. The daily loss may be more than 5%, but at a minimum it is 5%. There isn't a correct choice here. VaR doesn't tell max loss, but min loss. |
| ChirsMitch | Poorly worded |