# VAR increases or decreases question

This is 2010 Mock PM Case 3: 1. A change from 95% confidence level VAR to 99%, would provide a _______ VAR estimate? higher? lower? 2. A change from daily VAR to monthly VAR, the VAR estimate would ________? increase? decrease? According to guideline answer: Question 1, lower;question 2 increase. And: Using a 95% confidence level, the portfolio has an average daily VAR of \$1ml. Statement: the VAR represents a maximum loss that will not be exceeded. True/false? My opinion: when VAR comes with 5%, it is minimum loss; when comes with 95%, though same amount, it is maximum loss. Am I correct?

1. Higher - I don’t know why the guideline answer says lower 2. Increase False. VAR never gives you the maximum loss, only the maximum loss at a stated probability.

No VAR represents with 95 percent confidence (or whatever the number) the maximum loss. But there is a 5 percent chance that it could be WAY WAY worse than 1 million.

And yes 99 percent shoudl be HIGHER than 95 percent.

Agree… 1. Higher 2. Increase 3. True - assuming that question is asked in context of a previous stmt which does have 95% prob stated

1. VAR = Rp - z * Std dev If confidence interval increases from 95% to 99%, then the z score increases from 1.65 to 2.3. This VAR decreases. Thats correct right?

niraj_a Wrote: ------------------------------------------------------- > 1) VAR = Rp - z * Std dev > > If confidence interval increases from 95% to 99%, > then the z score increases from 1.65 to 2.3. > > This VAR decreases. Thats correct right? That’s actually my question. -The value of the VAR decreases. -The magnitude of the VAR increases. So if question simply ask about VAR, shall I say increase? or decrease? Higher? or Lower?

The actual number will be more negative (i.e. less) but VAR is measured as a loss number so a lower number indicates a greater loss and hence a higher VAR.