VaR

“we limit fund losses to 2% of assets with a 99% level of confidence”

Solution:

VaR is an expression of a minimum loss. It is incorrect for Patterson to state that the policy will limit fund losses to 2%over a 5- day period.

Why this?

VaR is a minimum loss if stated as a 1% (or 5%) VaR. But given a 99% level of CONFIDENCE means that we are 99% sure that losses would not exceed 2% of assets. Other way around in 1% of the cases the minimum loss would be 2%.

They are not giving the % VaR in this case, but the level of confidence!

The way i would look at it is this:

Patterson is stating the upper limit for losses, the maximum loss that they can incur

VaR is the minimum loss

No, VaR is the minimum loss if it’s stated like: 1%VaR is 20%. That means that the minimum loss is 20%. But if it’s stated (like in the question above) that the 99% confidence level of the VaR is 20% means that 99% of the time the loss is not more than 20%!

If I have let say 5% of probability of having a loss of minimum 10% then I have 95% of the time I have a loss of less than 10%

You are right. ****, that was a big miss. Now i hope someone can clarify. Where is this question btw?

Portfolio Management, Measuring and Managing Market Risk

Where’s the time period?

CFA MOCK PM question nr 60.

Here the complete statement:

“We limit fund losses to 2% of assets with a 99% level of confidence, with additional measures to limit total losses to 3% over a rolling 30-day period”

Up.

Do you know why limit fund losses to 2% is incorrect?

Its a point of distribution from the expected value (mean) but you don’t know shape of tail so you cannot say it is a maximum loss

you never know the shape of the tail, in fact it’s a problem of VaR (there are several quant methods to modify the var calculation with fatter tails,…)

I am quite sure what I am saying in this discussion… CFA is doing something wrong here

A 1% VaR (99% confidence) is the point on the distribution 2.33 standard deviations below the expected value

-> this is equivalent to 2% of assets

Below is from curriculum note 2.

Using the example given, it is correct to say

• 2% assets is the minimum loss we would expect 1% of the time; or

• 1% of the time, losses would be at least 2% of assets; or

• we would expect a loss of no more than 2% of assets 99% of the time.

The last sentence is sometimes mistakenly phrased as “99% of the time we would expect to lose less than 2% assets,” but this statement could be taken to mean that 99% of the time we would incur losses, although those losses would be less than 2% assets. In fact, a large percentage of the time we will make money.

sorry but you are saying exactly what I was saying since from the beginning.

“we would expect a loss of no more than 2% of assets 99% of the time.” is exactly what I mean which is different from what CFA is saying in the mock’s solution.

sorry I didn’t read

“we limit fund losses to 2% of assets with a 99% level of confidence” is not the same as “we would expect a loss of no more than 2% of assets 99% of the time.”

I know, the whole discussion here is exactly about this point

“we limit fund losses to 2% of assets with a 99% level of confidence” is not the same as “we would expect a loss of no more than 2% of assets 99% of the time.”

This means that with a confidence of 99% we are not going to have losses bigger than 2%.

There is a 99% chance that the expected loss over the next month is less than 2% assets -> wrong

We would expect a loss of no more than 2% of assets 99% of the time -> right

I think you are not getting the point. I am saying the same as you, the problem is that CFA is not.

There is a 99% chance that the expected loss over the next month is less than 2% assets

-> I think this is stating a maximum loss

There is a 99% chance that the expected loss over the next month is no more than 2% assets

-> while this one isn’t