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Answer: For the same confidence level, ES is always greater than VaR.
A is correct. Expected shortfall (ES) is always greater than or equal to Value at Risk (VaR) for a given confidence level a, since α measures the minimum loss in case the worst α probability event happens and ES accounts for the severity of expected losses beyond VaR. VaR provides a threshold for potential losses, indicating the maximum loss that is not expected to be exceeded with a certain level of confidence. However, it does not provide information about the potential losses that could occur if the loss exceeds the VaR threshold. On the other hand, ES estimates the expected loss given that a loss exceeds the VaR level, thus providing a more comprehensive view of tail risk. This makes ES a potentially more informative measure during periods of market turmoil, as it considers both the likelihood and the magnitude of extreme losses.
Author: LeetQuiz Editorial Team
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A risk analyst working at an investment bank is conducting an evaluation of the bank's risk measurement methodologies. The bank is currently relying on Value at Risk (VaR) as its primary risk assessment tool. Nevertheless, the analyst believes that Expected Shortfall (ES) could potentially serve as a better risk measure, especially in periods of market turbulence. When comparing VaR and ES, which of the following statements is correct?
A
For the same confidence level, ES is always greater than VaR.
B
If a VaR backtest at a specified confidence level is accepted, then the corresponding ES will always be accepted.
C
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.
D
While ES is more complicated to calculate than VaR, it is easier to backtest than VaR.
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