Financial Risk Manager Part 1
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Which of the following, if any, are true?
i) Value-at-Risk, VaR, is a not measure of downside risk
ii) Value-at-Risk, VaR, is the minimum loss at a given confidence level over a given period of time
iii) Value-at-Risk, VaR, does not capture catastrophic losses that have a small probability of occurring
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Explanation:
Statement i is false because Value-at-Risk (VaR) is indeed a measure of downside risk, representing the potential loss in value of a portfolio over a defined period for a given confidence interval.
Statement ii is false because VaR measures the maximum potential loss at a given confidence level, not the minimum loss.
Statement iii is true because VaR does not account for extreme tail events or catastrophic losses that have a very small probability of occurring. VaR focuses on losses within the confidence interval and ignores the magnitude of losses beyond that threshold.
Therefore, the only true statement is iii, making the correct answer E.
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