Sign up  |  Log in

*Spoiler* VAR Question

Given a daily 5% VAR of $5 million, which of these statements is correct and why?

“VAR is a measure of maximum loss, which in this case means we are 95% confident that the maximum 1-day loss is $5 million.”

“VAR is a measure that combines probabilities over a certain time horizon with dollar amounts, which in this case means that one expects to lose a minimum $5 million five trading days out of every 100.”

You’ve made it this far, and you know what it takes to pass. Don’t be fooled by false promises and unrealistic claims. Schweser’s CFA® study packages give you the proven study tools and expert instruction you need to finish the job.

The second one

5/100 is 5%

Var is a measure over a period of time - agree
in dollar amounts - agree

Arghh! Why can’t I put down a good reason to support my choice. I am just repeating the Qn

VAR combines probabilities ( ie. confidence intervals) with dollar amounts (IE value at risk)

Second is correct
5% VAR means a 90% confidence interval , but because we are interested only on the down side of the confidence interval we can state that probability as being 5 days out of 100.

That’s what I said too. Maybe Schweser is wrong.

This is from the sample exam afternoon session. Explanation given is this:

“Both are correct.

VAR can be considered a minimum loss expected over a time horizon at a given probability. In this particular case, one would expect to exceed the VAR 5% of the time. Watch the wordings in VAR questions.

VAR is a measure that combines probabilities over a certain time horizaon with dollar amounts, which in the statement means that one expects to lose at least $5 million in five trading days out of 100.”

I’m not getting anything out of the explanation. Anyone care to take a crack at it?

VAR is the minimum loss ( alternately maximum loss) for a given probability and time period–So first one is correct also

2nd is definitely correct

how are minimum loss and maximum loss interchangeable??

Good I feel better now.

they are both right.

1. 5% prob of minimum loss is $x, 95% sure that maximum loss is $x

wvhome Wrote:
——————————————————-
> how are minimum loss and maximum loss
> interchangeable??

Exactly. How?

KRochelli Wrote:
——————————————————-
> 1. 5% prob of minimum loss is $x,

I think I am starting to get it.

So we are sure that 95% of the time that the maximum loss is $5 million. 5% of the time the loss will exceed that. We don’t know what the maximum loss will be during that 5% of the time.

Quite confusing.

no, i don’t read it that way…………… yes, it’s the 95th percentile, but that is not the same as saying i’m 95% confident

if i got 95% percentile on GMAT (say i got 700), i wouldn’t say “i’m 95% confident that the maximum score is 700”

very bad wording IMHO

GMAT is different. That is a set score and you fall in a certain percentile. There is no confidence interval or loss, etc.

In case 1, VAR tells us the probability of maximum loss. 95% of the time we will NOT LOSE MORE than $5 million.

It can also tell us the probability of minimum loss. In case 2, 5% of the time we will lose AT LEAST $5 million.

Now that I understand it I think it was a solid question.