Just got this kaplan CFA question of the day, and I don’t understand the difference between B and C. I went back and checked the text and it explicitly says that both answers should be correct!
Ella Pitts, CFA, who managees $200 million in fixed income assets, estimates her Value at Risk to be $25 million with a 10% level of confidence. Pitts can MOST LIKELY conclude portfolio losses will:
A: Not exceed $25 million
B: Exceed $25 million only 10% of the time
C: Be less than $25 million 90% of the time
Answer Explanation: VAR measures the minimum dollar amount of a loss for a given level of confidence over a specified period of time. A VAR of $25 million means the manager can expect to have at least that dollar loss only 10% of the time in the future.
Choice “a” is incorrect. VAR does not cap the total risk loss at any number. The limitation of VAR is that it does not tell the manager the magnitude of the losses.
Choice “c” is incorrect. VAR measures the potential loss and does not provide any indication of the gains of the portfolio. This answer choice suggests that the portfolio will lose a dollar amount of $25 million or less almost all the time (90%).