A financial institution has predominantly relied on Value at Risk (VaR) as its primary risk assessment tool. Given the recent market volatility, the institution is considering the adoption of Expected Shortfall (ES) as a potentially more effective alternative. Before transitioning from VaR to ES, what are the essential differences and key insights that need to be understood about both Value at Risk and Expected Shortfall?

Exam-Like

For the same confidence level, ES is always greater than VaR.

76.2%

If a VaR backtest at a specified confidence level is accepted, then the corresponding ES will always be accepted.

9.5%

While VaR ensures that the estimate of portfolio risk is less than or equal to the sum of the risks of that portfolio's positions, Es does not.

14.3%

While ES is more complicated to calculate than VaR, it is easier to backtest than VaR.

0.0%

Financial Risk Manager Part 2