Question #1 of 36 Question ID: 1256895

Derivation Inc. has a portfolio of $100 MM. The expected return over one year is 6 percent,

with a standard deviation of 8 percent. What is the VaR for this portfolio at the 99 percent
con dence level?

A) $7.2 MM.

B) $12.6 MM.

C) $12.1 MM.

D) $2.0 MM.

Explanation

VaR = $100 MM [0.06 − (2.326)(0.08)] = $12.608 MM

(Book 1, Module 1.1, LO 1.b)

Question #2 of 36 Question ID: 1256896

A portfolio manager determines that his portfolio has an expected return of $20,000 and a

standard deviation of $45,000. Given a 95 percent con dence level, what is the portfolio's

VaR?

A) $54,250.

B) $94,250.

C) $43,500.

D) $74,250.

Explanation

The expected outcome is $20,000. Given the standard deviation of $45,000 and a z-score
of 1.65 (95% con dence level for a one-tailed test), the VaR is −54,250 [= 20,000 − 1.65
(45,000)].

(Book 1, Module 1.1, LO 1.b)

Question #3 of 36 Question ID: 1256886

A global portfolio is comprised of European and Emerging market equities. The correlation
of returns for the two sectors is 0.3. Based on the information below, what is the portfolio's
annual value at risk (VaR) at a 5 percent probability level?

Stock Value E(R) σ

European $800,000 9.0% 15.0%

Emerging $200,000 18.0% 25.0%

A) $230,491.

B) $130,300.

C) $110,700.

D) $128,280.

Explanation

Weight of European equities = WA = 0.80; Weight of Emerging = WB = 0.20

Expected Portfolio return = E(RP) = 0.8(9) + 0.2(18) = 10.80%

0.5
2 2 2 2
σP = [(W A ) (σA ) + (W B ) (σB ) + 2 (W A ) (W B ) rAB σA σB ]

0.5
2 2 2 2
= [(0.8) (0.15) + (0.2) (0.25) + 2 (0.8) (0.2) (0.3) (0.15) (0.25)]

0.5
= (0.0205)

= 14.32%

VaR = Portfolio value [E (R) − zσ]

= 1,000,000 [0.108 − (1.65) (0.1432)] = −$128,280, 280

(Book 1, Module 1.1, LO 1.b)

Question #4 of 36 Question ID: 1256916

Conditional VaR (i.e., expected shortfall) is best described as the:

A) loss conditional on speci c economic conditions.

B) loss if new assets are added to the portfolio.

C) loss conditional on speci c market conditions.

D) average loss given that losses exceed the VaR.

Explanation
The conditional VaR is the average of the losses that exceed the pre-speci ed worst case
return, which for example may be the pre-speci ed VaR.

(Book 1, Module 1.2, LO 1.c)

Question #5 of 36 Question ID: 1256893

Hugo Nelson is preparing a presentation on the attributes of value at risk. Which of Nelson's
following statements is not correct?

A) VaR(1%) can be interpreted as the number of days that a loss in portfolio value
will exceed 1%.

B) VaR was developed in order to more closely represent the economic capital
necessary to ensure commercial bank solvency.

C) VaR(10%) = $0 indicates a positive dollar return is likely to occur on 90 out of 100

days.

D) VaR can account for the diversi ed holdings of a nancial institution, reducing
capital requirements.

Explanation

VaR is de ned as the dollar or percentage loss in portfolio value that will be exceeded only
X% of the time. VaR(10%) = $0 indicates that there is a 10% probability that on any given
day the dollar loss will be greater than $0. Alternatively, we can say there is a 90%
probability that on any given day the dollar gain will be greater than $0. VaR was
developed by commercial banks to provide a more accurate measure of their economic
capital requirements, taking into account the e ects of diversi cation.

(Book 1, Module 1.1, LO 1.b)

Question #6 of 36 Question ID: 1256883

There are several di erent methods commonly used to compute value at risk (VaR). Which
of the following statements best describes historical VaR? It is:

A) an analysis used by investors that compares current market risks to historical

market risks.

B) a method that computes VaR by assuming that losses in the future will occur
with the same frequency and magnitude as they have in the past.
C) an analysis used by regulators that compares current market risks to historical
market risks.

D) an analysis that looks for trends in VaR from period to period to predict future
VaR.

Explanation

This is the basic approach and assumption of historical VaR.

(Book 1, Module 1.1, LO 1.a)

Question #7 of 36 Question ID: 1256901

If the one-day value at risk (VaR) of a portfolio is $50,000 at a 95% probability level, this
means that we should expect that in one day out of:

A) 20 days, the portfolio will decline by $50,000 or more.

B) 95 days, the portfolio will lose $50,000.

C) 95 days, the portfolio will increase by $50,000 or more.

D) 20 days, the portfolio will decline by $50,000 or less.

Explanation

A 95% one-day portfolio value at risk (VaR) of $50,000 means that in 5 out of 100 (or one
out of 20) days, the value of the portfolio will experience a loss of $50,000 or more.

(Book 1, Module 1.1, LO 1.b)

Question #8 of 36 Question ID: 1256912

Which of the following statements about value at risk (VaR) is true?

A) VaR is independent of probability level.

B) VaR decreases with lower con dence level.

C) VaR decreases with longer holding periods.

D) VaR is not dependent on the choice of holding period.

Explanation
VaR measures the amount of loss in the left tail of the distribution and increases with
lower probability levels. Conversely, VaR decreases with lower con dence levels (which is 1
minus the probability level). VaR actually increases with increases in holding period

(Book 1, Module 1.1, LO 1.b)

Question #9 of 36 Question ID: 1256900

Value at risk (VaR) is a benchmark associated with a given probability. The actual loss:

A) will have an inverse relationship with VaR.

B) may be much greater.

C) cannot exceed this amount.

D) is expected to be the average of the expected return of the portfolio and VaR.

Explanation

VaR is a benchmark that gives an estimate of what magnitude of loss would not be
unusual. The actual loss for any given time period can be much greater.

(Book 1, Module 1.1, LO 1.b)

Question #10 of 36 Question ID: 1256906

The pro t/loss distribution for Morozov Inc. (Morozov) is normally distributed with an annual
mean of $20 million and a standard deviation of $13 million. Which of the following amounts
is closest to VaR at the 99% con dence level using a parametric approach?

A) $10.29 million.

B) $1.45 million.

C) $5.48 million.

D) $13.54 million.

Explanation

VaR (1%) = −$20 million + $13 million × 2.33 = $10.29 million

Therefore, Morozov expects to lose at most $10.29 million over the next year with 99%
con dence. Equivalently, Morozov expects to lose more than $10.29 million with a 1%
probability.

(Book 1, Module 1.1, LO 1.b)

Question #11 of 36 Question ID: 1256917

Which of the following statements regarding value at risk (VaR) and expected shortfall (ES) is
least accurate?

A) The ES provides an estimate of the tail loss by averaging the VaRs for increasing
con dence levels in the tail.

B) The calculation of lognormal VaR and normal VaR will be similar when dealing
with long-time periods.

C) The calculated VaR amount is typically reported as a positive value.

D) As the number of VaR observations increases, the ES will increase.

Explanation

The calculation of lognormal VaR and normal VaR will be similar when dealing with short
time periods. VaR is always negative, but is typically reported as a positive value since the
negative amount is implied. As the number of VaR observations increases, the ES
increases and approaches the theoretical true loss.

(Book 1, Module 1.2, LO 1.c)

Question #12 of 36 Question ID: 1256882

The 10-Q report of Global Bank states that the monthly VaR of ABC Bank is $10 million at a

95% con dence level. What is the proper interpretation of this statement?

A) If we collect 100 monthly gain/loss data of Global Bank, we will always see ve
months with losses larger than $10m.

B) There is a 5% probability that the bank will lose less than $10m over a month.

C) There is a 5% probability that the bank will gain less than $10m each month.

D) There is a 95% probability that the bank will lose less than $10m over a month.

Explanation

There is a 95% probability that the bank will lose less than $10m in a month. We could also
say there is a 5% probability that we will lose more than $10m in a month. "If we collect
100 monthly gain/loss data of Global Bank, we will always see ve months with losses
larger than $10m" is not the correct interpretation of probability in that we cannot assume
outcomes with certainty, instead we need to assume probabilities.

(Book 1, Module 1.1, LO 1.a)

Question #13 of 36 Question ID: 1256908

A portfolio manager is constructing a portfolio of stocks and corporate bonds. The portfolio
manager has estimated that stocks and corporate bond returns have daily standard

deviations of 1.8% and 1.1%, respectively, and estimates a correlation coe cient of returns

of 0.43. If the portfolio manager plans to allocate 35% of the portfolio to corporate bonds
and the rest to stocks, what is the daily portfolio VaR (2.5%) on a percentage basis?

A) 2.57%.

B) 3.05%.

C) 2.27%.

D) 2.71%.

Explanation

First, calculate the standard deviation of the portfolio:

[0.652(0.0182) + 0.352(0.0112) + 2(0.35)(0.65)(0.018)(0.011)(0.43)]0.5 = 1.38%

Next calculate the portfolio VaR:

z2.5% × σ = 1.96(0.0138) = 2.71%

(Book 1, Module 1.1, LO 1.b)

Question #14 of 36 Question ID: 1256913

The price value of a basis point (PVBP) of a bond portfolio is $45,000. Expected changes in
interest rates over the next year are summarized below:

Change in Interest
Probability
rates

> +1.50% 1%

+1.00−1.49% 29%

0.00−0.99% 20%

−0.99-0.00% 45%

< −1.00% 5%

What is the value at risk (VaR) for the bond portfolio at a 99 percent con dence level?
A) $7,850,500.

B) $2,250,000.

C) $4,500,000.

D) $6,750,000.

Explanation

At 1% probability level change in interest rates is 1.50% or higher.

Change in Portfolio value for a 150 bps change in rates = 150 × 45000 = 6,750,000

VaR = 6,750,000

(Book 1, Module 1.1, LO 1.b)

Question #15 of 36 Question ID: 1256884

Super Hedge fund has $20 million in assets. The total return for the past 40 months is given
below. What is the monthly value at risk (VaR) of the portfolio at a 5 percent probability

level?

Monthly Returns

−22.46% 9.26% −4.69% −20.66% −2.77% 1.17% −16.11% −6.73%

0.57% 12.56% −18.26% −32.81% 24.15% −34.26% −5.49% −19.76%

−34.75% −12.02% 32.74% −31.35% 13.68% −31.13% 7.07% −33.56%

−20.37% 30.27% 31.09% −3.26% −14.42% 4.75% 15.63% −11.57%

7.23% −20.77% −19.61% −2.42% −30.59% 28.83% −22.25% −10.26%

A) $6,852,000.

B) $9,000,000.

C) $7,200,000.

D) $16,725,000.

Explanation
Sorted monthly returns (from low to high, in columns) are as follows:

−34.75% −31.35% −22.25% −19.61% −11.57% −4.69% 0.57% 6.35%

−34.26% −31.13% −20.77% −18.26% −10.26% −3.26% 0.95% 7.07%

−33.56% −30.59% −20.66% −16.11% −6.73% −2.83% 1.17% 7.23%

−33.16% −23.08% −20.37% −14.42% −6.37% −2.77% 1.58% 8.35%

−32.81% −22.46% −19.76% −12.02% −5.49% −2.42% 4.75% 9.26%

The 5% lowest return is the 2nd value (2 / 40 = 0.05), which is −34.26%%

Therefore 5% VaR for the portfolio = 0.3426 × $20,000,000 = $6,852,000

(Book 1, Module 1.1, LO 1.a)

Question #16 of 36 Question ID: 1256904

Portfolio A has total assets of $14 million and an expected return of 12.50 percent. Historical
VaR of the portfolio at 5 percent probability level is $2,400,000. What is the portfolio's

standard deviation?

A) 14.65%.

B) 12.50%.

C) 17.97%.

D) 15.75%.

Explanation

VaR = Portfolio Value [E(R)−zσ]

−2,400,000 = 14,000,000[0.125 − (1.65)(X)]

−2,400,000 = 1,750,000 − 23,100,000(X)

X = 17.97%.

Note that VaR value is always negative.

(Book 1, Module 1.1, LO 1.b)

Question #17 of 36 Question ID: 1256892

A large bank currently has a security portfolio with a market value of $145 million. The daily
returns on the bank's portfolio are normally distributed with 80% of the distribution lying

within 1.28 standard deviations above and below the mean and 90% of the distribution lying
within 1.65 standard deviations above and below the mean. Assuming the standard

deviation of the bank's portfolio returns is 1.2%, calculate the VAR(5%) on a one-day basis.

A) $2.04 million.

B) $2.87 million.

C) cannot be determined from information given.

D) $2.23 million.

Explanation

VAR (5%) = z5% × σ × portfolio value

= 1.65 × 0.012 × $145 million

= $2.871 million

(Book 1, Module 1.1, LO 1.b)

Question #18 of 36 Question ID: 1256897

 Annual volatility: σ = 20.0%

Annual risk-free rate = 6.0%

Exercise price (X) = 24

Time to maturity = 3 months

Stock price,
$21.00 $22.00 $23.00 $24.00 $24.75 $25.00
S

Value of call,
$0.13 $0.32 $0.64 $1.14 $1.62 $1.80
C

% Decrease
−16.00% −12.00% −8.00% −4.00% −1.00%
in S

% Decrease
−92.83% −82.48% −64.15% −36.56% −9.91%
in C

Delta (ΔC% /
5.80 6.87 8.02 9.14 9.91
ΔS%)

Alton Richard is a risk manager for a nancial services conglomerate. Richard generally
calculates the VaR of the company's equity portfolio on a daily basis, but has been asked to

estimate the VaR on a weekly basis assuming ve trading days in a week. If the equity

portfolio has a daily standard deviation of returns equal to 0.65% and the portfolio value is

$2 million, the weekly dollar VaR (5%) is closest to:

A) $21,450.

B) $47,964.

C) $107,250.

D) $29,100.

Explanation

The weekly VaR is:

2 million × 1.65 × 0.0065 × √5 = $47,964.

(Book 1, Module 1.1, LO 1.b)

Question #19 of 36 Question ID: 1256907

Which of the following statements about value at risk (VaR) is true?

A) VaR is not dependent on the choice of holding period.

B) VaR increases with longer holding periods.

C) VaR decreases with lower probability levels.

D) VaR is independent of probability level.

Explanation

VaR measures the amount of loss in the left tail of the distribution. It increases with lower
probability levels and increases in holding period.

(Book 1, Module 1.1, LO 1.b)

Question #20 of 36 Question ID: 1256905

Which of the following statements about value at risk (VaR) is true?

A) VaR is independent of probability level.

B) VaR is not dependent on the choice of holding period.

C) VaR increases with lower signi cance levels.

D) VaR decreases with longer holding periods.

Explanation

VaR measures the amount of loss in the left tail of the distribution and increases with
lower signi cance levels. VaR actually increases with increases in holding period.

(Book 1, Module 1.1, LO 1.b)

Question #21 of 36 Question ID: 1256885

Alto Steel's pension plan has $250 million in assets with an expected return of 12 percent.
The last thirty monthly returns are given below.

What is the 10 percent monthly probability VaR for Alto's pension plan?

21.84% −21.50% 31.76% 8.88% 2.54% 17.44%

6.97% 10.00% 2.71% 35.66% 31.07% 18.56%

9.82% −7.94% −0.78% 12.57% 11.77% 8.47%

2.99% 14.35% 14.20% 9.81% 11.03% 22.25%

9.68% 19.55% 8.53% 39.45% 36.15% 10.97%

A) $1,200,000.

B) $36,125,850.

C) $3,000,000.

D) $1,950,000.

Explanation

Sorted monthly returns (from low to high, in columns) are as follows:

−21.50% 2.99% 9.68% 11.03% 17.44% 31.07%

−7.94% 6.97% 9.81% 11.77% 18.56% 31.76%

−0.78% 8.47% 9.82% 12.57% 19.55% 35.66%

2.54% 8.53% 10.00% 14.20% 21.84% 36.15%

2.71% 8.88% 10.97% 14.35% 22.25% 39.45%

The 10% lowest return is the 3rd value (3 / 30 = 0.10), which is −0.78%.

Therefore 10% VaR for the portfolio = 0.0078 × 250,000,000 = 1,950,000.

(Book 1, Module 1.1, LO 1.a)

Question #22 of 36 Question ID: 1256911

For a $1,000,000 stock portfolio with an expected return of 12 percent and an annual

standard deviation of 15 percent, what is the VaR with 95 percent con dence level?

A) $247,500.

B) $150,000.

C) $120,000.

D) $127,500.

Explanation

VaR = Portfolio Value[E(R)−zσ]= 1,000,000[0.12 − (1.65)(0.15)] = −$127,500

(Book 1, Module 1.1, LO 1.b)

Question #23 of 36 Question ID: 1256915

The price value of a basis point (PVBP) of a $20 million bond portfolio is $25,000. Interest
rate changes over the next one year are summarized below:

Change in Interest
Probability
rates

> +2.50% 1%

+2.00−2.49% 4%

0.00−1.99% 50%

−0.99−0.00% 40%

< −1.00% 5%

Compute VaR for the bond portfolio at 95 percent con dence level.

A) $5,000,000.

B) $12,500.

C) $2,500,000.

D) $2,750,000.

Explanation

At 5% probability level change in interest rates is 2.00% or higher.

Change in Portfolio value for 200 bps change in interest rate = 200 × $25,000

VaR = $5,000,000

(Book 1, Module 1.1, LO 1.b)

Question #24 of 36 Question ID: 1256914

A portfolio comprises 2 stocks: A and B. The correlation of returns of stocks A and B is 0.8.

Based on the information below, compute the portfolio's annual VaR at a 5 percent
probability level.

Stock Value E(R) σ

A $75,000 12.0% 15.0%

B $25,000 10.8% 10.0%

A) $11,700.

B) $13,300.
C) $23,491.

D) $10,295.

Explanation

Weight of stock A = WA = 0.75; Weight of stock B = WB = 0.25

Expected Portfolio return = E(RP) = 0.75(12) + 0.25(10.8) = 11.70%

Portfolio Standard deviation =

0.5
2 2 2 2
SP = [(W A ) (SA ) + (W B ) (SB ) + 2 (W A ) (W B ) rAB SA SB ]

0.5
2 2 2 2
= [(0.75) (0.15) + (0.25) (0.10) + 2 (0.75) (0.25) (0.8) (0.15) (0.10)]

0.5
= (0.0178)

= 13.33%

VaR = Portfolio value [E (R) − zS]

= 100,000 [0.117 − (1.65) (0.1333)] = −$10,295

(Book 1, Module 1.1, LO 1.b)

Question #25 of 36 Question ID: 1256918

The expected loss given that the loss has exceeded the VaR is best described as the:

A) unexpected loss.

B) Poisson parameter.

C) economic capital.

D) expected shortfall.

Explanation

Expected shortfall is essentially an average or expected value of all losses greater than the
VaR. An expression for this is:

E[LP | LP > VaR]

(Book 1, Module 1.2, LO 1.c)

Question #26 of 36 Question ID: 1256903

The minimum amount of money that one could expect to lose with a given probability over a

speci c period of time is the de nition of:

A) the hedge ratio.

B) the coe cient of VaRiation.

C) value at risk (VaR).

D) delta.

Explanation

This is an often-used de nition of VaR.

(Book 1, Module 1.1, LO 1.b)

Question #27 of 36 Question ID: 1256899

In the presence of fat tails in the distribution of returns for a linear portfolio, VaR based on

the delta-normal method would:

A) be the same as the true VaR.

B) overestimate the true VaR.

C) cannot be determined from the information provided.

D) underestimate the true VaR.

Explanation

The VaR would be underestimated because of the greater frequency of losses in the tails
of the distribution.

(Book 1, Module 1.1, LO 1.b)

Question #28 of 36 Question ID: 1256898

The accuracy of a value at risk (VaR) measure:

A) is complete because the process is deterministic.

B) is one minus the probability level.

C) can only be ascertained after the fact.

D) is included in the statistic.

Explanation

This is a weakness of VaR. The reliability can only be known after some time has passed to
see if the number and size of the losses is congruent with the VaR measure.

(Book 1, Module 1.1, LO 1.b)

Question #29 of 36 Question ID: 1256891

Tim Jones is evaluating two mutual funds for an investment of $100,000. Mutual fund A has

$20,000,000 in assets, an annual expected return of 14 percent, and an annual standard

deviation of 19 percent. Mutual fund B has $8,000,000 in assets, an annual expected return

of 12 percent, and an annual standard deviation of 16.5 percent. What is the daily value at

risk (VaR) of Jones' portfolio at a 5 percent probability if he invests his money in mutual fund
A?

A) $13,344.

B) $1,668.

C) $38,480.

D) $1,924.

Explanation

Daily standard deviation for mutual fund A = 0.19 / √250= 0.012

Daily return = 0.14 / 250 = 0.00056

VaR = Portfolio value [E (R) − zσ]

= $100,000 [0.00056 − (1.65) (0.012)] = −$1,924

(Book 1, Module 1.1, LO 1.b)

Question #30 of 36 Question ID: 1256890

A portfolio comprises 2 stocks: A and B. The correlation of returns of stocks A and B is 0.4.

Based on the information below, what is the portfolio's value-at-risk (VaR) at a 5 percent

probability level?

Stock Value E(R) σ

A $85,000 15.0% 18.0%

B $15,000 12.0% 10.0%

A) $23,491.

B) $11,784.

C) $1,410.

D) $13,300.

Explanation

Weight of stock A = WA = 0.85; Weight of stock B = WB = 0.15

Expected Portfolio return = E(RP) = 0.85(15) + 0.15(12) = 14.55%

Portfolio Standard deviation =

0.5
2 2 2 2
SP = [(W A ) (SA ) + (W B ) (SB ) + 2 (W A ) (W B ) rAB SA SB ]

0.5
2 2 2 2
= [(0.85) (0.18) + (0.15) (0.10) + 2 (0.85) (0.15) (0.4) (0.18) (0.10)]

0.5
= (0.02547)

= 15.96%

VaR = Portfolio value [E (R) − zS]

= 100,000 [0.1455 − (1.65) (0.1596)] = −$11,784

(Book 1, Module 1.1, LO 1.b)

Question #31 of 36 Question ID: 1256894

On December 31, 2006, Portfolio A had a market value of $2,520,000. The historical standard

deviation of daily returns was 1.7%. Assuming that Portfolio A is normally distributed,

calculate the daily VaR(2.5%) on a dollar basis and state its interpretation. Daily VaR(2.5%) is
equal to:

A) $83,966, implying that daily portfolio losses will fall short of this amount 2.5% of
the time.
B) $83,966, implying that daily portfolio losses will only exceed this amount 2.5% of
the time.

C) $70,686, implying that daily portfolio losses will fall short of this amount 2.5% of
the time.

D) $70,686, implying that daily portfolio losses will only exceed this amount 2.5% of
the time.

Explanation

VaR(2.5%)Percentage Basis = z2.5% × σ = 1.96(0.017) = 0.03332 = 3.332%

VaR(2.5%)Dollar Basis = VaR(2.5%)Percentage Basis × portfolio value = 0.03332 ×

$2,520,000 = $83,966

The appropriate interpretation is that on any given day, there is a 2.5% chance that the
portfolio will experience a loss greater than $83,996. Alternatively, we can state that there
is a 97.5% chance that on any given day, the observed loss will be less than $83,996.

(Book 1, Module 1.1, LO 1.b)

Communities Bank has a $17 million par position in a bond with the following

characteristics:

The bond is a 7-year, zero-coupon bond.

The market value is $12,358,674.

The bond is trading at a yield to maturity of 4.6%.

The historical mean change in daily yield is 0.0%.

The standard deviation of the position is 1%.

Question #32 - 33 of 36 Question ID: 1256888

The one-day VaR for this bond at the 95% con dence level is closest to:

A) $105,257.

B) $339,487.

C) $203,918.

D) $260,654.

Explanation
VaR is the market value of the position times the price volatility of the position times the
con dence level, which in this case equals:

($12,358,674) × (0.01) × (1.65) = $203,918

(Book 1, Module 1.1, LO 1.b)

Question #33 - 33 of 36 Question ID: 1256889

The 10-day VaR on this bond is closest to:

A) $644,845

B) $736,487.

C) $866,111.

D) $487,698.

Explanation

The VaR is calculated as the daily earnings at risk times the square root of days desired,
which is 10. The calculation generates:

($203,918)(√10) = $644,845

(Book 1, Module 1.1, LO 1.b)

Question #34 of 36 Question ID: 1256902

A hedge fund portfolio has an expected return of 0.1 percent per day and a 5 percent
probability 1-day value at risk (VaR) of $909. Which of the following statement is the best

descriptor of this information?

A) The minimum loss for the worst 5% of the days is $909.

B) The minimum daily loss on the portfolio is $909.

C) The portfolio will earn more than $909 only 5% of the time.

D) The maximum daily loss on the portfolio is $909.

Explanation
By de nition, VaR is the minimum loss for the worst 5% of the days or the maximum 1-day
loss 95% of days. A minimum or maximum daily loss on the portfolio of $909 does not
incorporate the alpha (probability). Alternatively, VaR can be stated in terms of con dence,
e.g. in this case you could say you are 95% con dent the one-day VaR will not exceed $909.

(Book 1, Module 1.1, LO 1.b)

Question #35 of 36 Question ID: 1256909

An insurance company currently has a security portfolio with a market value of $243 million.

The daily returns on the company's portfolio are normally distributed with a standard

deviation of 1.4%. Using the table below, determine which of the following statements are
true.

Zcritical

Alpha One-tailed Two-tailed

10% 1.28 1.65

2% 2.06 2.32

I. One-day VaR(1%) for the portfolio on a percentage basis is equal to 3.25%.

II. One-day VaR(10%) for the portfolio on a dollar basis is equal to $5.61 million.

III. |One-day VaR(6%)| > |one-day VaR(10%)|.

A) II and III only.

B) I and III only.

C) I, II, and III.

D) I only.

Explanation
To nd the appropriate zcritical value for the VaR(1%), use the two-tailed value from the
table corresponding to an alpha level of 2%. Under a two-tailed test, half the alpha
probability lies in the left tail and half in the right tail. Thus the Zcritical 2.32 is appropriate
for VaR(1%). For VaR(10%), the table gives the one-tail Zcritical value of 1.28. Calculate the
percent and dollar VaR measures as follows:

VaR (1%) = z1% × σ

= 2.32 × 0.014

= 0.03248 ≈ 3.25%

VaR (10%) = z10% × σ × portfolio value

= 1.28 × 0.014 × $243 million

= $4.35 million

Thus, Statement I is correct and Statement II is incorrect. For Statement III, recall that as
the probability in the lower tail decreases (i.e., from 10% to 6%), the VaR measure
increases. Thus, Statement III is correct.

(Book 1, Module 1.1, LO 1.b)

Question #36 of 36 Question ID: 1256910

If the expected change in a xed income portfolio is $520,000 and the standard deviation of

the estimated change in the portfolio is $2,275,500, the 95 percent value-at-risk (VaR) for this

portfolio is closest to:

A) $3,223,197.50.

B) $4,598,597.50.

C) $855,400.00.

D) $3,743,197.50.

Explanation

VaR for this portfolio would be:

−[$520,000 − 1.645($2,275,500)] = $3,223,197.50

(Book 1, Module 1.1, LO 1.b)