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Answer: The daily loss on the portfolio will not exceed $1 million 95% of time.
## Explanation Value at Risk (VaR) at 95% confidence level means that there is a 5% probability that losses will exceed the VaR amount. Therefore: - **Option A is incorrect**: The daily loss will exceed $1 million only 5% of the time (not 95%) - **Option B is correct**: The daily loss will not exceed $1 million 95% of the time - **Option C is incorrect**: VaR is not the maximum possible loss; it's a probabilistic measure where losses can exceed VaR in extreme cases - **Option D is incorrect**: VaR is a statistical measure, not a consensus among risk managers **Key Concept**: VaR at 95% confidence means we expect losses to stay below the VaR amount 95% of the time, and exceed it only 5% of the time.
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Q-64. A risk manager states that the VaR of the portfolio at 95% confidence interval and 1-day holding period is $1 million. Which of the following statement is TRUE?
A
The daily loss on the portfolio will exceed $1 million 95% of time.
B
The daily loss on the portfolio will not exceed $1 million 95% of time.
C
The maximum loss that the portfolio can incur is $1 million at any point in time.
D
95% of risk managers will agree that the maximum loss on the portfolio will be $1 million.